There are 5 Questions You Need to Understand before You can Decide How Many Stocks You Should Be Holding at any particular time.
How Many Stocks Should I Own?
There is no simple answer to this question because it comes down to:
- The Portfolio Size – How much money 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.
I am assuming here that you are not an Institutional Investor Managing Billions, or a multi-millionaire (Yet!)
1. How Many Stocks in Your Portfolio?
If you are starting out 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 dollars to buy and $10 to sell, you would typically need to make 2% on that trade simply to break even. If you buy 1 stock for $3000, that $20 trading fee would represent only 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 then 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.
2. What is the Effort Required to Manage a Stocks 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.
3. 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, then 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 have a good knowledge of each stock or industry. Professionals can manage huge diversification because they employ teams of technical analysts and even they get it wrong the majority 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
4. How Many Stocks for a Medium-Term Investor?
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.
5. How Many Stocks for 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 the live streaming prices. It is also a very difficult way to make money, as you are assessing a Stock on volatility and momentum as opposed to reviewing the companies fundamentals and overall success.
The Liberated Stock Trader
The Liberated thinker does not follow the advice of Wall Street Money Managers, who suggest no more that 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 bear and the more money you need to make just 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 max 5 to 10 great 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!