Ideal Number of Stocks to Have in a Portfolio

Aug 29, 2022 By Triston Martin

Although various sources can have an opinion on the "right" number of stocks in your portfolio, there is no one right response to the question. The proper amount of stocks to include in your portfolio will depend on various factors, including your home country and investment horizon, economic conditions, and your inclination to read the latest market news and keep an eye on your investments.

Understanding Ideal Portfolio Number of Stocks

Investors diversify their capital across several investment vehicles, mainly reducing the risk they are exposed to. Particularly, diversification permits investors to limit their risk exposure to what's referred to by the term "unsystematic risk, " which is the risk associated with a specific company or sector.

Investors aren't able to take on the risk of systematic exposure, for example, the possibility of a downturn in the economy that could drag down the entire market; however, research in the field of modern portfolio theory has demonstrated that an equity portfolio with diversified equity can reduce the risk that is not systemic to the point of being near zero, and keeping the same expected returns that a portfolio that has excessive risk would.

This means that investors must take on higher risks to earn greater yields. However, they don't have a higher return when they take an unsystematic risk. The more equity you have inside your account, the less the risk of unsystematic exposure. A portfolio containing 10 or more stocks, especially those spread across different industries or sectors, is much safer than a portfolio consisting of just two stocks.

Consider Transaction Fees

Of course, the transaction costs associated with holding more shares can be significant. It is usually best to keep the minimum amount of shares needed to reduce their risk exposure that is not managed effectively. What is the amount? There isn't a consensus on the answer; however, there's a reasonable range. Recent research suggests that investors who take advantage of the lower transaction costs offered by online brokers can improve their portfolios by putting in the number of stocks they like. But there is the time-cost myth, and many investors discover that their portfolios perform as well or even better by opting for index-based securities instead. These are known as ETFs.

Suppose you're scared of having to investigate, select, and remain aware of numerous individual stocks. In that case, you might consider using ETFs or index funds to offer quick and easy diversification across different industries and market cap categories. These instruments allow you to purchase a range of stocks in one purchase.

Stocks and Bonds

The answer will depend on the strategy you use regarding how you allocate your money. If you choose an aggressive strategy, you could assign all parts of the fund to stocks. If you are moderately aggressive, move most of the portfolio to stocks and the remaining 20 percent to bonds and cash. If you want moderate growth, invest 60 percent of your investment portfolio in bonds and stocks and 40 percent in bonds and cash. Also, take a cautious method, and if you wish to protect your capital instead of earning higher returns and earning more, you should invest less than 50% of your portfolio in stocks.

A common sense rule of thumb is to reduce the number of stocks you own and increase the number of high-quality bonds as you age to be more secure from possible market crashes. For instance, a 30-year-old investor might have 70% of stocks and 30 percent of bonds, whereas an older person would hold 40% of stocks and 60 percent of bonds.

Diversity in Your Stocks

You shouldn't wish to take on a risk concentrated in one industry or company. Some drivers could be found in the economy and the markets - and they don't affect all industries equally. Your stock portfolio isn't designed to be able to go up or down all simultaneously. A diverse portfolio will include sections in red and some in green, as various factors affect the market daily. Diversifying your stocks exposes you to different industries and helps stability during recessions. It's also simpler to forecast risk in the future for more accurate forecasts.

If your portfolio is heavily concentrated on a small number of companies or certain industries, if one of them or an industry suffers a decline, your entire portfolio is affected. Diversification can help to ensure that this does not happen or offer a buffer in case one sector is prone to falling. One of the most effective methods to reduce risk and create diversification of your portfolio to ensure a diverse portfolio is to make investments in lower-cost broad-market index funds like, for instance, the S&P 500 fund, a total market fund, or funds that are devoted to specific segments of the market, such as small-cap or technology fund.

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