The One Thing Too Many People Get Wrong About Buying Stocks

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  • You'll often hear that it's a good idea to diversify your investment portfolio.
  • That doesn't mean you need to own hundreds of individual stocks.
  • You can also choose to invest in broad market ETFs. 

Whether you're buying stocks for your IRA, brokerage account, or both, it's important to assemble a nice diverse mix of them. A diversified portfolio could help protect you during periods of market volatility. And it could also help you grow a lot of wealth over time.

But one mistake many investors make when buying stocks is loading up on too many of them. And that's a trap you don't want to fall into.

The problem with owning too many stocks

It's definitely a good idea to aim for a broad mix of stocks in your investment portfolio. But there may come a point when you've taken that concept to too much of an extreme.

If you own too many individual stocks, you might struggle to keep tabs on them. And that could mean hanging onto a stock that consistently underperforms, thereby losing money.You might also end up with a portfolio that isn't as diverse as you think it is if you buy too many stocks. 

Let's say you own shares of 80 different companies. The value of your shares can fluctuate over time so that if, say, you started out with 15% of your portfolio in energy stocks, you might end up with 35% of it in energy stocks down the line. That's not necessarily what you want. But if you have so many stocks and share prices to track, you might struggle to strike a better balance. 

How many stocks should you own?

If you're thinking that an ideal stock portfolio is one that contains several hundred stocks, you'd generally be wrong. There are no hard and fast rules when it comes to the specific number of stocks you should own, but the Motley Fool says that the average diversified portfolio holds between 20 and 30 stocks, and the Motley Fool's official recommendation is to own at least 25 different stocks.

As such, you may decide you want to own 32 stocks, or 35, and that's okay. The key is to limit yourself to a number of stocks that you can reasonably manage. 

You can potentially keep tabs on 30 different companies, give or take. But continuously tracking the performance of 100 different companies may be beyond your capabilities.

If you're worried that owning fewer stocks will leave you with a portfolio that's less diverse, you can always load up on some broad market ETFs, or exchange-traded funds, instead. With ETFs, you can take a bit more of a hands-off approach as an investor. And because ETFs offer built-in diversification, they're a good bet for building a portfolio that's conducive to growing wealth.

Finally, if your goal is to make money in the stock market, be sure to focus on the quality of the stocks you're buying, not the quantity. You're better off owning shares of 20 great companies than shares of 30 companies that are just mediocre. And you definitely shouldn't invest in new companies without doing your research first for the express purpose of diversifying, because that might set you back more than help you achieve your financial goals.

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