While it might seem that many sources have an opinion about the right number of stocks to own in a portfolio, there is no single correct answer to this question.
The correct number of stocks to hold in your portfolio depends on many individual factors, from your country of residence to your investment time horizon, the market conditions, and your propensity for keeping up to date on the financial news.
Key Takeaways
- Diversification is critical to achieving long-term returns while limiting risk.
- The precise number of investments in a diversified portfolio depends on the individual.
- Redundancy is usually inefficient. That is, having many stocks that pay high dividends or many growth stocks increases your costs while doing little to reduce risk.
Understanding the Ideal Number of Stocks to Own
Investors diversify primarily to minimize their exposure to risk. Diversification reduces the investor's exposure to unsystematic risk, which can be defined as the risk associated with a particular company or industry.
It is not possible to eliminate all risk from a portfolio. There's always the risk that an economic recession will drag down the entire stock market. However, academic research in the area of modern portfolio theory has shown that a well-diversified equity portfolio can effectively reduce unsystematic risk to near zero while maintaining the same expected return level a portfolio with excessive risk would have.
In other words, while investors must accept greater systematic risk for potentially higher returns (known as the risk-return tradeoff), they generally do not enjoy increased return potential for bearing unsystematic risk.
The more equities you hold in your portfolio, the lower your unsystematic risk exposure. A portfolio of 10 or more stocks, particularly across various sectors or industries, is much less risky than a portfolio of only two stocks.
Consider Funds
The transaction costs of holding more stocks can add up, so it is generally optimal to hold the minimum number of stocks necessary to effectively remove their unsystematic risk exposure.
What is this number? There is no consensus answer, but there is a reasonable range.
A well-diversified equity portfolio can effectively reduce unsystematic risk to near-zero levels without affecting the investor's long-term return.
More recent research suggests that investors taking advantage of the low transaction costs afforded by online brokers can hold as many stocks as they want. However, there is a time-cost fallacy and most investors find their portfolios perform as well if not better when they use an online broker and buy mostly exchange-traded funds (ETFs).
If you are intimidated by the idea of having to research, select, and track many individual stocks, you may wish to consider using index mutual funds or ETFs to provide quick and easy diversification across different sectors and market cap groups. These funds effectively let you purchase a basket of stocks with one transaction.
How Many Stocks Should You Own for a Diversified Portfolio?
There is no magic number, but it is generally agreed upon that investors should diversify by choosing stocks in multiple sectors while keeping a healthy percentage of their money in fixed-income instruments. The bonds or other fixed-income investments will serve as a hedge against stock market downturns.
This usually amounts to at least 10 stocks. But remember: many mutual funds and ETFs represent ownership in a broad selection of stocks such as the S&P 500 Index or the Russell 2000 Index.
How Many Stocks and Bonds Should Be in a Portfolio?
If you take an ultra-aggressive approach, you could allocate 100% of your portfolio to stocks. A moderately aggressive strategy would contain 80% stocks to 20% cash and bonds. For moderate growth, keep 60% in stocks and 40% in cash and bonds.
A conservative approach calls for investing no more than 50% in stocks.
A good rule of thumb is to scale back the percentage of stocks in your portfolio and increase the percentage of high-quality bonds as you age.
This protects the investor from ill-timed market downturns. A 30-year-old investor might hold 70% in stocks and 30% in bonds, having plenty of time to recover from market downturns. A 60-year-old would have 40% in stocks and 60% in bonds.
How Many Stocks Should I Own With $10,000?
Many individual investors are choosing to diversify their investments using ETFs. This gives them access to many more companies than they would be able to buy into if they had to purchase individual shares.
Ten thousand dollars invested in several ETFs could result in exposure to thousands of stocks.
The Bottom Line
You don't need a huge number of stocks and bonds to create a balanced portfolio. You just need to make diverse choices, balancing risk and safety. That is your best strategy to achieving your financial goals.
If you want to achieve diversity without the hands-on supervision and potential costs that come with owning individual stocks and bonds, consider mutual funds or exchange-traded funds. A wise selection of these will give you broader exposure than almost any individual investor could otherwise achieve.
FAQs
There might be other practical considerations that limit the number of stocks. However, our analysis demonstrates that, whether you own ETFs, mutual funds, or a basket of individual stocks, a well-diversified portfolio requires owning more than 20-30 stocks.
How many stocks is good for a portfolio? ›
Understanding the Ideal Number of Stocks to Own
The more equities you hold in your portfolio, the lower your unsystematic risk exposure. A portfolio of 10 or more stocks, particularly across various sectors or industries, is much less risky than a portfolio of only two stocks.
What is the optimal number of shares in a portfolio? ›
Optimal diversification strategy
Maintaining a portfolio with fewer than 20 stocks may leave you overly exposed to the performance of a limited number of companies or sectors, increasing the risk of significant losses if any of those investments underperform.
What is the effective number of stocks in a portfolio? ›
Effective # of Stocks (Breadth) is the reciprocal of HHI (i.e., 1/HHI) and reflects the 'effective' number of stocks that are represented in the index. For example, a highly concentrated index with 100 stocks may be effectively represented by only 10 stocks.
What is the ideal portfolio stock number? ›
Between 20 and 60 stocks
This is the ideal number of stocks to own. A number between this range will offer optimal diversification and, at the same, be easy to manage and monitor. As discussed above, different investments are expected to perform differently at a given time.
How many stocks are in the Warren Buffett portfolio? ›
Among the 47 stocks Berkshire Hathaway holds, the top 10 represent about 84% of the company's holdings. Here's a rundown of Buffett's 10 largest holdings based on Berkshire Hathaway's most recent filings, including its 13F filing from May 15, 2024.
Is 30 stocks too many in a portfolio? ›
Private investors with limited time may not want to have this many, but 25-35 stocks is a popular level for many successful investors (for example, Terry Smith) who run what are generally regarded as relatively high concentration portfolios. This bent towards a 30-odd stock portfolio has many proponents.
How many stocks should you own in Warren Buffett? ›
This means that buying more than 12-20 stocks will not make your portfolio more immune from market volatility. Indeed, looking at portfolios of successful investors like Warren Buffett and other gurus, you see 8-15 stocks, which is the correct diversification.
What is considered a good stock portfolio? ›
A diversified portfolio should have a broad mix of investments. For years, many financial advisors recommended building a 60/40 portfolio, allocating 60% of capital to stocks and 40% to fixed-income investments such as bonds.
How many stocks does the average person own? ›
The average diversified portfolio holds between 20 and 30 stocks.
The Rule of 90 is a grim statistic that serves as a sobering reminder of the difficulty of trading. According to this rule, 90% of novice traders will experience significant losses within their first 90 days of trading, ultimately wiping out 90% of their initial capital.
What is the best stock portfolio ratio? ›
Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.
How much of one stock is too much in a portfolio? ›
Key Points: Concentration risk is usually defined as having more than 10-15% of your portfolio invested in a single position. Employers offer many ways to own stock, so it can be challenging to reduce exposure.
How many stocks should a beginner portfolio have? ›
“How many stocks should I own as I begin my investing career?” As part of your initial portfolio management approach, you should aim to invest in a minimum of four or five stocks—one from most, if not all, of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities).
How many shares is a good amount? ›
The number of shares you should buy depends on the price of the stock and how much money you are willing to invest. For example, if a stock is worth $10 and you have a $10,000 portfolio, a good number of shares would be between 20 to 100 depending on your risk tolerance.
How many stocks make a diversified portfolio? ›
We show that a well-diversified portfolio of randomly chosen stocks must include at least 30 stocks for a borrowing investor and 40 stocks for a lending investor. This contradicts the widely accepted notion that the benefits of diversification are virtually exhausted when a portfolio contains approximately 10 stocks.
How much should a stock be in a portfolio? ›
For example, if you're 30, you should keep 70% of your portfolio in stocks. If you're 70, you should keep 30% of your portfolio in stocks. However, with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age.
What is the best ratio for a portfolio? ›
If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
