How many stocks do you really need in your portfolio? While there certainly isn't a single answer to this question, there are some good ways to go about arriving at a number that's right for you. Let's try to answer the question of how many stocks you should own.
How many different stocks should you own?
The average diversified portfolio holds between 20 and 30 stocks. Diversifying your portfolio in the stock market is an investing best practice because it decreases non-systemic, or company-specific, risk by ensuring that no single company has too much influence over the value of your holdings.
Owning more stocks confers greater stock portfolio diversification, but owning too many stocks is impractical. The objective is to achieve diversification while still thoroughly understanding why you're invested in each of the stocks in your portfolio.
Should you add to existing stock holdings or diversify?
The answer to this question depends on several different factors, including your investing time horizon, risk tolerance, current portfolio diversification, and tax status.
If your stock holdings are not well diversified, then buying new stocks is probably your best option. If you're adding to a diversified portfolio, then you can:
- Increase your investment in each existing stock in your portfolio by the same amount.
- Increase your exposure to the stocks in your portfolio that you like the most.
- Further diversify your portfolio by purchasing additional stocks.
None of these options is categorically better than the other. Further diversifying your holdings can be a solid choice provided that you have the capacity to oversee an even broader portfolio.
Large vs. small portfolio size
Whether your portfolio holds a large or small number of stocks, there are both benefits and drawbacks:
|Large -- many stocks in portfolio||
|Small -- few stocks in portfolio||
Benefits of portfolio diversification
Diversifying your portfolio is one of the best things you can do to lower the overall risk of your holdings. Diversification removes non-systemic risk, leaving only the overall risk of investing in the stock market.
Well-diversified portfolios, which are ideally diversified across companies, industries, and geographies, tend to consistently gain value over time. They are also less volatile. The failure of any one company, the decline of any industry, or poor economic conditions in any single geographic area are offset by the gains of other holdings in a diversified portfolio.
While diversifying your portfolio is recommended, owning a large portfolio of stocks can be unappealing for several reasons. Aside from the administrative burden and possibility of high trading fees, you may not want to be tasked with choosing individual stocks. Buying shares in an exchange-traded fund (ETF), which holds a collection of stocks, can be an excellent option that confers instant diversification. Some ETFs hold hundreds of stocks in their portfolios.
How many stocks should you own with $1K, $10K, or $100K?
While you might think that the amount of money you have to invest should directly affect how many stocks you own, the decision of how many different stocks to buy is -- ideally -- still largely driven by other factors.
Diversifying your portfolio is crucially important no matter how much money you are investing, although if you only have $1,000 available, then buying 20 to 30 stocks is likely too cumbersome and time-consuming. Even with $10,000 or $100,000 available, you may decide to achieve diversification by just investing in mutual funds or ETFs. Regardless of how much money you have to invest, the number of stocks you own should be commensurate with the amount of stock research you are willing to conduct.