As fractional share buying has exploded in popularity over the past few years, building a diversified portfolio has never been easier. Generally, a good starting point for well-diversified investors is to buy somewhere around 25 stocks.
However, I go well beyond this threshold for the three reasons we will look at today. In doing so, I run the risk of diversifying too much and simply matching the market's returns, yet I remain optimistic I can outperform with a more expansive portfolio.
Now, let's look at why I believe that -- and why owning over 100 stocks helps me sleep at night.
FOMO: Fear of missing out
Most people fear letting their portfolio grow too big as it becomes difficult to keep track of all the moving parts. However, I am odd because I am even more scared of missing out on potential multibaggers -- even if I don't have a deep knowledge of them.
What's more important to me is whether or not a business fascinates me. This fascination can come in many forms. Possibly it's a financial metric that blows me away. Or perhaps it's an industry chart that shows a megatrend providing a tailwind for the company's operations. Or maybe the CEO is an undeniable innovator, and I want to bet on that success.
It can be anything -- as long as I'm fascinated. To put it very simply, I would be more heartbroken to see a stock I admire skyrocket without my having any skin in the game than I would be to own it and see it go to zero. While capital preservation may be paramount to some investors, growth is more important to me, regardless of what volatility I may have to face.
But of course -- and here's the big caveat -- this strategy definitely isn't for everybody, and that's what makes investing unique to each of us and why it is essential to have your portfolio match your temperament.
Adding to my winners
By taking tiny positions (sometimes even $5) in businesses that fascinate me, I do two things:
- Make sure I don't forget them.
- Put some skin in the game, however marginal it may be.
With this little bit of skin in the game, I can let these companies I admire percolate on the back burner. Not forgetting about them -- but not worrying about their day-to-day price swings either.
From here, I can add to the position if a stock's investing thesis becomes more alluring and my knowledge of the company grows. But for the most part, I just let the stocks run on their own.
However, once their stock price doubles, I use that as a natural opportunity to do more research on them and, more importantly, add a little to my holding (once again, perhaps just $5).
And if it triples, I do the same. And if it quadruples, again the same, and so on until it has grown to a position in my portfolio that requires no further investment (i.e., becomes too large of a holding for me to sleep well at night).
This explanation is a long-winded way of saying I water my flowers (or add to my winners) and let them continue to grow.
The best part about "having" to continue to learn about these winning stocks is that I was already fascinated by them at some point or they wouldn't be in the portfolio -- making the added learning fun and not tedious.
Letting losers fade away
In addition to allowing me to add to my winners over time, owning over 100 stocks also offers natural diversification, allowing my losers to fade away into obscurity in a worst-case scenario.
Look no further than Teladoc Health (TDOC -4.67%) and the huge decline I faced as a shareholder. Yet, even with a considerable 4% portion of my holdings allocated to the company, my portfolio remained flat the following day after the company's concerning earnings report, thanks to an otherwise strong day in the market and success elsewhere in what I held.
So now what? Well, in Teladoc's case -- nothing. It still accounts for 2% of my portfolio, so it doesn't necessarily warrant new buying. Down nearly 90% from its all-time highs, there's no real reason to sell here either.
Am I upset with management? Absolutely! However, I am still fascinated by its ideas and its mission statement "that everyone should have access to the best healthcare, anywhere in the world on their terms."
With that said, and regardless of your investing temperament, buy what you love, add to your winners, and leave things alone if possible.