One of the key pillars of investing is diversification. You should aim for diversity in sectors, company sizes, and geographies because you don't want your portfolio's chances for success to rely on too few factors.
Getting the right amount of diversification requires investing in many different companies -- the Motley Fool recommends buying and holding at least 25 stocks. But before you go and fill up your portfolio, there are a few things you'll want to keep in mind.
There are two ways to think about buying your stocks: when to introduce new stocks into your portfolio, and when to purchase more shares of stocks you currently own. In either case, here's why you shouldn't buy all your stocks at once.
It's OK to take your time
There isn't a one-size-fits-all approach regarding how long it should take to fill up your portfolio with new stocks. Rather, your investing timeline should take into account to how much you know about the businesses. The goal is to eventually have a diverse portfolio of 25 stocks, not necessarily to start with that many. Investing in businesses without knowing much about them is one of the easiest ways to lose money in the stock market. It's not investing; it's essentially gambling.
You don't need to spend hours upon hours reading financial statements or listening to earnings calls, but you should know some baseline things about a business, like how it makes money, its competitive advantage, and growth plans. If you can answer those questions and the answers match your standards, perfect. If you can't answer those questions, it's probably a sign you're not ready to invest in that company yet.
Investing in a company and then quickly having to sell the stock because you realized it wasn't good for you can put you in an unfavorable situation. You could either be taking a loss on the investment or owe taxes if you happened to make any capital gains while you owned it.
Dollar-cost averaging can help ease you into it
Instead of filling up your portfolio at once, a great strategy would be to use dollar-cost averaging. Dollar-cost averaging is when you invest on a set schedule regardless of how stock prices are performing at the time. For instance, you could decide to invest $250 every Tuesday, and when Tuesday comes around, your job is to make your investments no matter what. Stock prices up? Invest. Stock prices down? Invest. Stock prices flat? Invest.
Dollar-cost averaging is good for two main reasons. To begin, it prevents you from trying to time the market. Trying to wait until the "perfect" time to invest can be tempting when you're looking to add stocks to your portfolio. Spoiler alert: There isn't a perfect time. The second reason is that it helps to avoid a situation in which you invest a lump sum right before a huge market drop.
Imagine if you had a lump sum to invest and were interested in Meta Platforms (META 2.65%) in the weeks leading up to February 2022. From Feb. 2 to Feb. 3, Meta's stock plunged by over 26%, so a lump sum investment right beforehand could have lost a quarter of its value almost instantly. Even if you stay focused on the long term, that amount of immediate loss can be hard to stomach.
Data by YCharts.
As you begin to research and make informed investing decisions about stocks, you could start adding new companies into your dollar-cost averaging schedule. Using the above example, maybe you'll find that you begin dividing the $250 weekly investment between 10 stocks, then 15 stocks, then 20 stocks, and so forth.
Time in the market beats timing the market, but you never want to rush into an investment just for the sake of time.
