102-25 How many stocks should you own? A practical approach

There is no simple answer to the question “How Many Stocks Should I Own?” because it comes down to portfolio size, the effort to manage your portfolio, and your investing timeframe.

  • The portfolio size and how much money do you have to invest
  • The effort you can dedicate to managing the portfolio; the more stocks you own, the more effort it is to manage.
  • Whether you are a longer-term/medium or short-term investor.
Course 102 - Stock Market Investing
How many stocks should you own? A practical approach

How Many Stocks Should You Own?

How many stocks you should own depends on your portfolio size, the time you invest, and your trading style. Day traders will own one or two daily stocks, but long-term investors should target at least 25 stocks.

Portfolio Size

If you are starting trading and your portfolio has, for example, $3000, it may be prudent to buy 1 or 2 stocks only as the trading costs can still be limited. If you buy $1000 of stock and typically pay $10 to buy and $10 to sell, you would typically need to make 2% on that trade simply to break even. If you buy one stock for $3000, that $20 trading fee will represent only a 0.6% increase required to break even.

If you have a larger pool of cash for investing, say $20,000, it may be prudent to buy 4 Stocks at $5000 each. You would need only a 0.4% rise in stock price to break even. With four stocks, it would not be too much effort to review them regularly and ensure you always have a contingency plan ready to bail out or buy more.

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Effort Required to Manage your Stock Portfolio

The more stocks you have, the more effort is required to review them. If you have 2-4 stocks, you can easily review the News / Earnings reports and Sentiment Indicators. If you have 20 stocks, this could represent a significant amount of time. Having a job, a family, and a life outside trading could impair your ability to maintain a healthy work/life balance.

If you have a larger pool of cash for investing, say $20,000, it may be prudent to buy 4 Stocks at $5000 each. You would need only a 0.4% rise in stock price to break even. With four stocks, it would not be too much effort to review them regularly and ensure you always have a contingency plan ready to bail out or buy more.

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How Many Stocks for a Long-Term Investor?

If you invest for the longer term, let us say you review your stock performance on a quarterly or yearly basis and prefer the security of diversification. It could be practical to own more stocks representing, for example, industry leaders in different sectors.

However, too much diversification can be negative, as you need to know each stock or industry well. Professionals can manage huge diversification because they employ teams of technical analysts, and even they get it wrong most of the time.

In my view, it’s best to own as many stocks as there are situations in which : (a) you’ve got an edge; and (b) you’ve uncovered an exciting prospect that passes all the tests of research

Peter Lynch – One up on Wall St. Page 239

How Many Stocks for a Swing Trader/Trend Trader?

If you trade in and out of stocks on a weekly to a monthly time frame, then fewer stocks might be better, and the effort to review and make a judgment call on exact entry and exit points can be very time-consuming.

How Many Stocks for Day Traders?

Day traders are in the market for a few days or less and attempt to ride momentum on only 1 or 2 stocks to effectively steal a few crumbs from the table without taking the whole loaf. This inevitably involves working with intraday charts and watching live streaming prices. It is also a very difficult way to make money, as you are assessing a Stock on volatility and momentum instead of reviewing the company’s fundamentals and overall success.

This article has been updated to include the latest academic thinking on portfolios, diversification, and stock ownership.

How Many Stocks Should I Own? [5 Answers]

The Liberated Stock Trader

The Liberated thinker does not follow the advice of Wall Street Money Managers. They suggest that no more than 5% or 10% of your portfolio should be in any one stock or that you hedge your investments against them falling by shorting other stocks. The Liberated thinker likes to keep it simple. The more contracts you open or trade you make, the more transaction costs you bear and the more money you need to make to break even. If you think your stock will turn against you, sell it, and invest in a stock you prefer.

Buy only as many stocks as you can manage and only as many as pass your tests. I constantly have about 150 stocks that I follow every day but am only invested in 25 to 35 stocks. This is both manageable and keeps the costs down.

But that is best for me, what is best for you? Only you can decide!

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