A sound principle of stock investing is to spread your portfolio around different companies.
What if you don't? You face the danger that if something bad happens to your single investment, you have virtually no way to cushion the blow.
Fair enough, but exactly how many stocks should you own? A dozen? 50? 150? The answer is typically fewer than the number of fingers on your hands.
There's a fallacy in managing a portfolio that contains dozens of stocks: While your exposure to risk in individual stocks is smaller, you are also forfeiting the chance to make substantial profits in the big winners. The reason is simple: You won't have enough shares to enjoy productive gains.
Another drawback of an over-diversified portfolio is that it takes a lot of work to watch over dozens of companies, tracking their performance, earnings reports and other developments. With a smaller number of holdings, it's easier to stay on top of the companies you own.
Fewer Is Better
"The big money is made by concentration, provided you use sound buy and sell rules along with realistic general market rules," IBD founder and Chairman William J. O'Neil wrote in his landmark book, "How to Make Money in Stocks."
O'Neil's guidelines for individual investors break down like this:
For a beginning portfolio of about $3,000, just two stocks are sufficient.
For a portfolio of $5,000 to $20,000, three stocks can be a manageable load.
For accounts up to $200,000, four or five stocks are enough.
Even those who have more than a million dollars to invest should limit themselves to six or seven stocks.
Of course, to have success with a handful of stocks, you have to make the correct picks. This doesn't mean you have to luck out with fantastic choices.
A careful process of selecting companies with superior profit and sales growth, profit margins and market-leading products should narrow down the field for you pretty quickly. Deduct the stocks lacking good chart profiles, and you end up with an even more refined (and shorter) list of potential investments.
Don't trust yourself to do this? One option: Turn to the IBD Sector Leaders, those few elite companies that are highlighted at the top of some sectors in the IBD NYSE + Nasdaq Smart Tables, today starting on Page B3. Another option: Utilize IBD Leaderboard.
Stocks from these features have a potent blend of fundamentals, and as a group they have performed well above the S&P 500. Analysis of their charts, written by IBD market writers, can guide you on when to buy.
No doubt, a better stock than any that you own will come along and tempt you. If you are convinced about buying it, then sell one stock that's not performing as well as your others to make room on your portfolio.
Remember, there will be times when the right number of stocks to own is zero. When the general market goes into a correction or bear market, no degree of diversification can protect you adequately from losses. This is particularly true of growth stocks, which can generate superior returns, but tend to fall more during weak markets. Use IBD Market Pulse, published with the Big Picture every day, to guide you.
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.
What is a good number of stocks to own? ›
What's the right number of companies to invest in, even if portfolio size doesn't matter? “Studies show there's statistical significance to the rule of thumb for 20 to 30 stocks to achieve meaningful diversification,” says Aleksandr Spencer, CFA® and chief investment officer at Bogart Wealth.
What is a good number of stock shares to buy? ›
The more equities you hold in your portfolio, the lower your unsystematic risk exposure. A portfolio of 10 or more stocks, particularly those across various sectors or industries, is much less risky than a portfolio of only two stocks.
What is a good number to invest in stocks? ›
A 25-30% stock allocation would be more aggressive, but investors with a higher risk tolerance could allocate even more money. Following the 50-30-20 rule on an after-tax income of $50,000 would mean investing $10,000 per year or approximately $833 per month.
Is 100 stocks too many? ›
But while it's definitely a good idea to own a few dozen stocks, you don't want to load up on too many. Stocks aren't an investment to set and forget. It's important to keep tabs on the companies you're invested in. And that's a hard thing to do 80 or 100 times over.
Is 20 stocks too much? ›
The average diversified portfolio contains between 20 and 30 stocks. While there is no one-size-fits-all answer to this question, it is influenced by a variety of factors, including your investment horizon, risk tolerance, and current portfolio diversification.
Is 20 stocks a lot? ›
An unlucky selection of 20-30 stocks can massively underperform other luckier choices over 25 years. To mitigate that risk, a long-term investor should be more aggressive in diversifying the portfolio and hold more stocks than the number suggested by a static one-period risk model.
How many stocks does Warren Buffett own? ›
Among the 45 stocks Berkshire Hathaway holds, the top 10 represent about 87% of the company's holdings. Here's a rundown of Buffett's 10 largest holdings based on Berkshire Hathaway's most recent 13F filing, filed Feb. 14, 2024.
Is it worth it to buy 1 share of stock? ›
Buying just one share of stock may seem like a small investment, but it can set you on the right path for future investment decisions and meeting your personal finance goals. An advantage of purchasing only one share is that, for the most part, it's a low-cost way to gain exposure to the stock market.
What is 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. Meanwhile, others have argued for more stock exposure, especially for younger investors.
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
What is the 90% rule in stocks? ›
The 90/10 rule in investing is a comment made by Warren Buffett regarding asset allocation. The rule stipulates investing 90% of one's investment capital toward low-cost stock-based index funds and the remainder 10% to short-term government bonds.
What is the best stock to buy for beginners? ›
Best Stocks To Invest In 2024 For Beginners
- UnitedHealth Group Incorporated (NYSE:UNH) Number of Hedge Fund Holders: 104. Quarterly Revenue Growth: 14.10% ...
- JPMorgan Chase & Co. (NYSE:JPM) Number of Hedge Fund Holders: 109. ...
- Advanced Micro Devices, Inc. (NASDAQ:AMD) ...
- Adobe Inc. (NASDAQ:ADBE) ...
- Salesforce, Inc. (NYSE:CRM)
“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).
Is owning 30 stocks too much? ›
The right number of stocks to own is different for every investor. Most investors aim to own somewhere between 10–30 stocks in their portfolio. In my experience, owning fewer than 10 stocks is too little diversity and too much risk concentrated on just a few positions.
Is it OK to buy 10 shares of stock? ›
Most experts tell beginners that if you're going to invest in individual stocks, you should ultimately try to have at least 10 to 15 different stocks in your portfolio to properly diversify your holdings.
How much stock does an average person own? ›
U.S. families held a median value of $52,000 in stocks as of 2022, far below the peak of more than $58,592 in 2001. This figure includes directly held stocks and mutual funds.
How many stocks should I own with $10,000? ›
Portfolio allocation
There's one very good reason to avoid risk initially. With a $10,000 portfolio it's impossible to diversify adequately. While you should aim to have 10-15 stocks eventually, it's too many for now.
