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Highlights
- One of the most common doubts in the minds of investors is about the number of stocks they should hold in their investment portfolio.
- As experts say that a stock portfolio should be diversified, packed with stocks of different attributes.
- However, it is still not that easy to arrive at a satisfactory conclusion about the exact number of stocks one should own in their portfolio.
One of the most common doubts in the minds of investors is about the number of stocks they should hold in their investment portfolio. As experts say that a stock portfolio should be diversified, packed with stocks of different attributes. However, it is still not that easy to arrive at a satisfactory conclusion about the exact number of stocks one should own in their portfolio. Here, we will try to discuss the question in detail.
Legendary investor Benjamin Graham had stated in his highly popular book ‘Intelligent Investor’ that one can build a perfectly diversified equity portfolio with 10 to 30 stocks. Even he could not mention a single number to the question.
Then there is a suggestion by famous investor and author Seth Klarman that it’s safe to say that no single stock should be more than 5-6% of the entire portfolio.
Saying this, we should not forget that stock investing is a different ball game altogether for different investors. No one solution fits all. There are several factors such as end goal, risk appetite, investment time horizon and others that should be considered while arriving at the ideal number of stocks in the portfolio.
Source: © Robynmac | Megapixl.com
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What to consider while deciding on stocks in your portfolio
Investors diversify their stock holdings to cut down on unsystematic risk, or a risk related to a specific company or sector. However, this strategy doesn’t hold much value in case of systemic risks such as a recession.
Unsystematic risk diminishes as investors include more equities in their portfolio. A portfolio of 10 stocks from different sectors or industries would be less risky compared to a portfolio of only two stocks. However, investors must also understand that owning many stocks to effectively remove their unsystematic risk exposure can also add up the transaction costs.
There may not be a consensus answer on the ideal number of stocks, there is a reasonable range. According to several latest research papers, the number could be in the range of 20 to 30.
Key points to remember while deciding about stocks:
- Risk appetite
- Return expectations
- Research capability
- Company’s fundamentals
- Company’s management and capital structure
- Investment time horizon
Source: © Cammeraydave | Megapixl.com
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The Bottom Line
There are several things to keep in mind while deciding about stocks. However, as per a general rule, most investors own 15 to 20 stocks at least in their portfolios. In case you are not comfortable carrying out stock research on your own, consider using index funds or ETFs to seek quick and easy diversification across different sectors and market cap groups.
Finally, it is the investment strategy of an investor which helps them decide if they want a concentrated portfolio of high dividend-yielding blue-chip stocks or high-growth small-cap stocks. It ultimately depends on the investors if they want to diversify their portfolio to a larger number of stocks to reduce the overall risk of investment.
