"Diversification - How many stocks should you own"
- Thomas Habith
- Jan 14
- 3 min read
Updated: Feb 11
How Many Stocks Should You Have in Your Portfolio?
Building a well-diversified portfolio is one of the most important steps in investing. A common question many investors ask is: “How many stocks should I hold to achieve proper diversification?” The answer, as with many investment-related topics, is not one-size-fits-all. Let’s explore the factors that determine the ideal number of stocks for your portfolio.
The Purpose of Diversification
Diversification is a risk management strategy that involves spreading your investments across various assets to reduce exposure to any single stock or sector. By holding multiple stocks, you can mitigate the impact of poor performance from any one company while benefiting from the collective growth of others.
The Numbers Game: What Studies Say
Research suggests that holding 20 to 30 stocks across different industries can significantly reduce unsystematic risk—the risk tied to individual stocks or sectors. However, this number is not a strict rule. Some investors prefer leaner portfolios with fewer stocks, while others opt for broader diversification with 50 or more holdings.
Factors to Consider When Deciding
Risk Tolerance
If you’re risk-averse, a larger number of stocks may offer more stability. Conversely, those with a higher risk tolerance might be comfortable with a concentrated portfolio.
Time and Effort
Managing a large portfolio requires more time for research and monitoring. If you have limited time, a focused portfolio of carefully selected stocks might be more practical.
Investment Goals
Long-term investors aiming for steady growth might lean towards diversification, while short-term traders could focus on a few high-potential stocks.
Knowledge and Expertise
Seasoned investors may feel confident in selecting a smaller number of high-quality stocks. Beginners might prefer broader diversification to minimize mistakes.
The Importance of Sector and Geographic Diversity
Diversification isn’t just about the number of stocks; it’s also about the variety. Holding 30 stocks in the same industry or region doesn’t provide true diversification. Aim to spread your investments across:
Different sectors (e.g., technology, healthcare, consumer goods).
Geographic regions (e.g., domestic and international markets).
The Case for Individual Preferences
Ultimately, the “perfect” number of stocks depends on your unique situation. Some investors thrive with a concentrated portfolio of 10 high-conviction stocks, while others prefer the safety of owning shares in 50 or more companies. Both approaches can work, as long as they align with your risk tolerance, goals, and ability to manage your investments.
Final Thoughts
There’s no universal answer to how many stocks you should hold. The key is finding a balance that suits your individual needs and comfort level. Start by assessing your risk tolerance, time commitment, and investment objectives. Remember, diversification is a tool to help manage risk, but the quality of your stock selections matters just as much as the quantity.
In the end, the best portfolio is the one that allows you to sleep soundly at night while staying on track to achieve your financial goals.
Take a look at our Watchlist and get some inspiration for your next investment!
Looking to sharpen your investing skills or gain insights from the pros?
Discover timeless classics and powerful strategies from legendary investors and traders. Whether you're a beginner or a seasoned investor, these books offer actionable advice, market wisdom, and strategies to achieve financial success. Dive in now and take your investing journey to the next level!