Having a diversified stock portfolio is one of the absolute bedrocks of a successful investment strategy, but even the most hardened investors oftentimes grapple with the idea of balancing the number of stocks that they own.
The Ideal Number of Stocks
When talking about this elusive perfect ratio of investments, it is important to understand that the answer depends on a number of different factors.
From personal variables such as your age, individual financial goals and risk tolerance, to the overarching market conditions that affect everyone more or less equally.
As an example, younger investors usually take higher risks and opt for a larger number of stocks, while those nearing the retirement phase of their life and who rely on their investments for steady income often go with a more conservative approach.
The same principle is usually applied when talking about risk appetite, as financial experts will generally advocate for a portfolio of 10 to 20 different stocks for long-term investors with a moderate risk threshold, while those with an aggressive investment approach are advised to own upwards of 30 to 50 stocks or even more, using this greater level of diversification and the latitude to seize more short-term opportunities.
How Many Stocks Should I Own With $10,000?
Allocating the right number of individual stocks when you're constrained by a limited budget can be a daunting endeavor. Nevertheless, some general principles can guide you.
With a $10k budget for example, you might be better off casting a wider net and owning anywhere between 30 and 50 stocks, in order to both capitalize on the growth trajectories of multiple companies and better safeguard your money against substantial losses in any single stock.
How Much of My Portfolio Should Be in Individual Stocks?
The percentage of your portfolio allocated to individual stocks is another important consideration, and the term or strategy you will see most often used by investors is called the “5% rule”.
This rule states that you should never invest more than 5% of your total portfolio into a single stock, which will inherently reduce the impact of a negative performance of an individual stock on your overall investments.
How Often Should You Swap Stocks?
The frequency with which you should reevaluate or swap stocks in your investment portfolio depends on your investment strategy. Active traders may do this frequently, even daily, while long-term investors may review their holdings quarterly or annually.
Diversifying Your Portfolio: Key Tips
For starters, consider allocating your investments across companies from various business sectors in order to avoid putting all your eggs in one proverbial basket. This tactic minimizes the risk of a single stock's underperformance wreaking havoc on your entire portfolio.
You might also contemplate diversifying across different stock categories, such as growth stocks and value stocks.
While growth stocks are generally more volatile, they offer the allure of higher returns.
Value stocks, conversely, are usually less volatile and offer greater stability but with limited upside potential.
Additionally, consider geographical diversification by investing in both domestic and international stocks. This strategy broadens your exposure to various economies and dilutes risk.
Last but certainly not least, consider a multi-asset approach which includes both stocks and bonds, in order to hedge against the overarching stock market volatility.
Bottom Line
While there's not a single definitive number of stocks that every investor should seek to hold in their portfolio, the principle of diversification remains the cornerstone of a successful strategy.
Whether you are a modest-risk or aggressive investor, having a few dozen or more reliable stocks can safeguard you against unexpected single stock movements and protect your investments in the long run.
