One of the core tenets of being a responsible retail investor is not to put all your eggs in one basket -- nor even a couple of them. You should buy a diversified portfolio of (hopefully great) stocks that offer you a hedge against company- and sector-specific woes. But how many stocks is diverse enough, and how many are too many?
As Market Foolery host Chris Hill and senior analyst Jim Mueller reflect in this segment of the Market Foolery podcast, a person only has so much energy and time to dedicate to following individual companies, and you do want to be an informed investor, don't you? Actually, the answer to that can be a bit more complicated. Allow them to explain...
A full transcript follows the video.
This video was recorded on Feb. 14, 2019.
Chris Hill: Question from Greg, who asks a great question and really a timeless question. He asks, "How many stocks should I own? I hear and read about only having about 25 stocks to watch or hold at a time. I have more than 45. What are your thoughts?"
Jim Mueller: Greg, you're a piker. [laughs]
Hill: Whoa, whoa! Why do you have to take a shot at Greg like that?
Mueller: No insult meant or anything like that. It really depends on the person. I have three different accounts that I control. I have 12 stocks in one, 20 in another, and 60 or 70 in the third one.
Hill: Let me just add, you do this for a living, so I would expect you to have more. [laughs]
Mueller: Yeah. But my point is, I don't follow all 60 or 70 of those stocks. If you want a lot of stocks -- and people have done very, very well in investing in a lot of stocks. Peter Lynch, for instance. The saying was he never met a stock he didn't like. And he had a big team following them for him. But on a personal level, if you enjoy the game of investing, if you enjoy reading about companies and following them and listening to conference calls and thinking about them and where they can go, sure, put in as many stocks as you can comfortably follow, and even a bunch of stocks that you invest in based on somebody you trust. I mean, the one account that has 60 or 70, those are David Gardner picks on Stock Advisor that I just buy monthly for that account. I trust David's picking ability. Whether they go up or down, that's what happens.
The more concentrated portfolios I have, my taxable is the one that has just a dozen. Those are the ones I keep a pretty close eye on. Netflix and a couple of others.
The whole idea about having a bunch of stocks is to get diversification. But you need diversification not just in the number of stocks. If you have 25 and 15 of them are in the tech sector, you're not diversified. You need to diversify across industries, and most people don't have a lot of expertise in multiple industries. So, to get the diversification effect, I think one of the best ways is to have half or two-thirds of your portfolio in a broad market index like the Vanguard Index Fund. Really low fees. You don't want to pay too much for this. But you get all the diversification from that. And then start investing in some individual stocks that really pique your interest and you know you'll follow. You should do OK that way.
Hill: Also, you talk about the different ways to diversify. One way to do that is, and you touched on this, how much leash you give a stock, how often you check in on it. The more stocks you own, the more you find that you're going to have some group of those stocks that you're not really checking because you feel secure in how they're doing. Maybe once a quarter, that sort of thing. You've got others that are on a shorter leash, that you think, "Maybe this is one I need to cut back on. Maybe this is one that I need to get out of." But invariably, you're going to have a diversity of attention that you pay to them.
Mueller: There's that diversification as well. Certainly don't check it every day.
Hill: Yeah, don't do that.
Mueller: Not even every week. Maybe once a month. Just see, what's the latest news? Did the CEO run off with a mistress of some sort and abscond with all the money? Did he die and not pass on the cryptocurrency password?
Hill: How crazy is that story? [laughs]
Mueller: Wow! [laughs] So keep a general eye on it, but once a month is fine, unless you really enjoy the game.