How many stocks should you own?
The important question is, how many stocks should you have in your portfolio?
I am assuming that you are not an institutional investor managing billions of dollars or a multi-millionaire (Yet!)
There is no simple answer to this question because I believe it comes down to:
- Portfolio Size
- The effort you can dedicate to managing the portfolio.
- Whether you are a longer-term/medium or short-term investor.
If you are trading and your portfolio has $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 to break even. If you buy 1 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, let’s 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 4 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.
The effort required to manage the 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. If you have a job, a family, and a life outside Trading, this could impair your ability to maintain a healthy work/life balance.
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 the majority of the time.
As Peter Lynch recommends in his classic investment book:
“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
Medium Term Investor
If you trade in and out of stocks on a weekly to monthly timeframe, then fewer stocks might be better, and the effort to review and make a judgment on exact entry and exit points can be very time-consuming.
Short Term / 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.
The liberated thinker does not follow the advice of Wall Street money managers, who suggest no more than 5% or 10% of your portfolio should be in any one stock or that you should hedge your investments against them falling by shorting other stocks. The liberated thinker likes to keep it simple. The more contracts you open or trades you make, the more transaction costs you have 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 a maximum 2 to 6 stocks. This is both manageable and keeps the costs down.