How Should Investors Avoid Spreading Their Portfolios Too Thin?

In the stock market, it's tough to find consistency. Great companies may profit investors over the long term, but even the best of them will have months when they miss the mark and lose ground. But if you need a bit of consistency, look no further than the Rule Breaker Investing podcast, which always ends the month with a win for its listeners: a mailbag episode.

In this segment from the podcast, a listener who has used both the Stock Advisor and Rule Breakers services to build a diversified portfolio asks host and Motley Fool co-founder David Gardner for help with a problem that he is in part responsible for causing. Billy keeps seeing fresh new stock recommendations he'd like to invest in, but he doesn't want to wind up owning too many companies. How should he pick which ones to sell, and how many different stocks should he hold? These are good problems to have, and David is happy to offer some advice.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 25, 2019.

David Gardner: Rule Breaker mailbag item No. 5. This is from Billy Fallon. "Hello! I just started investing in individual stocks this year. I've used both Stock Advisor and Rule Breakers to put together a portfolio of 40 companies already." I'm going to hard stop it there for a sec, Billy.

First of all, this is yet another person who's written in this month saying, "I'm a member of both Stock Advisor and Rule Breakers." We really appreciate that. Those are our two biggest services here at The Motley Fool. If you're a listener and you haven't joined either one, my suggestion is to get started. Pick your poison. For a lot of us, Stock Advisor -- which is our largest service -- is a little bit safer, a little bit more vanilla ice cream, mom-and-pop successful investing. In fact, it is our best-performing scorecard. It has a real mix of large and small companies of all types. My brother Tom pick stocks there, too. Rule Breakers, for those who use it and love it, you're going to know that these are stocks that are a little bit more high-flyers, more edgy sometimes, their technologies unproven in some cases. If that's the style that you want to pursue as an investor, I would suggest you own Rule Breakers. I'm really happy to say, I'm reading from a lot of corresponds this week who have both.

All right, back to your note, Billy. "My question is, with the long-term investment strategy and all of the new picks that come out each week, how do I decide which stocks to sell so I have room for fresh picks in the future and not spread my funds too thin? It's really hard to keep my portfolio from expanding to too many different companies because the Motley Picks each week make these companies sounds so great." Those are new ideas that we keep coming out with. "When a company in my current portfolio seems to be trending down after a couple of quarters, it's so tempting to cut my losses and either add to my winners or invest in a new company. Thanks for any help. Billy Fallon."

Well, let me just first of all say, congratulations. You have built, with the help of our services, a 40-stock portfolio. That is spectacular. I'm guessing you were able to do it fairly rapidly. It didn't take you 40 years. We weren't around 40 years ago. It didn't take you 20 years to do that. You may have done that in a year or less.

Now, each of us should size our portfolio according to some calculation in our minds of how much time and interest we have to really follow our portfolios. If you have less time and interest -- hint, hint -- have fewer stocks. Also, how much money we have. if we're near the end of our lives and we have more money than we've ever had before, it makes a lot of sense for me to have that broadly diversified. Some of our members own hundreds of stocks. On the other hand, if you're just starting out as a young investor, or even as a middle-aged investor just starting out, probably makes sense not to go to 100 right away. There is a process. Each of us needs to ask ourselves, "What feels right for me?" And then we need to go through that process. Billy, great job! Forty companies. That's a strong portfolio.

I'm the first to say I don't think you need any more companies. I do want to ask you, rhetorically, I ask each of us, which is the situation you are in: either A, you have more money coming in, or B, you do not have more money coming in. A lot of the work that I do assumes, and it is aimed at those who do have more money coming in, you have a salary, you're getting paid twice a month, you have a regular stream of money, you're taking a portion of that, saving it. God bless you, great job, you're saving the money! And then, you are investing that money in one or more stocks. Which is spectacular, that's true of a lot of us. There are also a lot of people listening to me today, who have finished that portion of their life, and they are just investing, their... as we say, it's all they're gonna have, they want to grow it, and I think it's a great idea to keep growing it. But to buy a new stock you'd have to sell existing stocks. So, to that first group I would say, just keep buying stocks, that make your portfolio reflect your best vision for our future. So whether it's a stock that my brother picks next month, or I picked three months ago, maybe an industry you know something about, I would say, add that. But at the same time, realize that if you have dozens and dozens of stocks, the time that you spend gets stretched and you should focus your research time on your larger holdings. It's usually the companies that are winning for you that you might be adding to over time. Now, finally, for that second group of people, where they don't have any new money coming in, I would just say you have to think it through. What is the right number of stocks for you to have? You probably have things outside of stocks. You might have fixed income, real estate, other properties. A lot of financial advisors will want you to be diversified, and I bet many of you are. So I think you have to decide, but there's no single correct number for the stocks in your portfolio in either of those situations.

To close, you should be focusing your time in three places -- for stocks or holdings that represent 5% or more of what you have, spend a lot of time looking at those. For ones that represent, let's say, 1.5% to 5% allocation for you, spend medium time with those. Finally, with stocks -- and if you own 100 stocks, this is going to be true of most of them -- that represent less than 1.5% of your overall net worth, you don't have to spend a lot of time. They don't count for as much as some of the others. It's not just always about the number of stocks that you're invested in. It's the actual percentage allocations, especially if you're adding to your winners, focusing on the ones that really count for you.