A work colleague told me to have a vasectomy. It was after our third child. They couldn’t understand why anyone would have more than two children. Their request got me thinking, what’s the correct number of children for a family? Is there a magic number that suits all families? Surely not.
It’s the same with the number of stocks in a portfolio. It depends on many personal factors. At the moment, I’m holding only four stocks in my portfolio. It’s riskier, but it works for me. When I held more stocks, I struggled to keep up with all the related news.
Any portfolio size can work
Let’s have a look at the portfolios of some highly successful investors. Warren Buffett holds 47 stocks, and Bill Ackman holds seven stocks, and Mohnish Pabrai holds two stocks. All three individuals are highly successful at investing.
It dispels any myths that there is a perfect number that suits everyone. You are unique. Find a portfolio size that fits you personally. Use the following criteria to help make the assessment.
- Investing style
Time has a twofold impact — how much time can you dedicate to research, and how long until you need the money?
Stocks are not my 9-to-5 job — I’m in college and have a part-time job. If you are like me, you don’t have countless hours to track a large number of stocks. You can’t spend all day reading quarterly reports. Be realistic with yourself, and choose a manageable number.
A long time horizon matters. When will you need the money? If it’s 10+ years, you can afford to have a more concentrated portfolio. The volatility will be higher, but so will be your results.
What’s your investment approach? I prefer to invest in growth stocks that will dominate the future. These companies typically don’t have a history of earnings. You have to make projections of the future — which require in-depth research.
The research takes up a lot of time. As a result, I’m not able to research many companies. So, my portfolio will be on the smaller side of things.
Other styles don’t require as much in-depth research. So, you can include more stocks in the portfolio. If you do dividend investing, you can have more companies in your portfolio. Your primary focus will be on companies with a long history of paying dividends. If it’s more than 20 years, you be will be fine.
How much money are you investing? Are you intending on preserving or growing your money? Those with a lot of money tend to want to preserve It. Those with less capital are looking for growth.
If you are nearing retirement, you might want to invest in a broadly diversified stock portfolio. Your primary goals are not to lose money and to keep up with inflation. But, for those starting out investing. You don’t have much money to invest. So, your best bet is a concentrated portfolio. It is risky, but it has an excellent upside.
We are not all equally gifted. Some can understand multiple industries easier than others. Their circle of competence is wide. Others can only understand a handful of niches. I try to stick with technology and insurance companies. I stay away from Pharmaceutical companies because I can’t understand them.
In time, with learning and experience, you might widen your competencies. If that happens, you can increase the number of stocks in your portfolio.
It would be best if you were honest with yourself. Warren Buffett says, “You don’t have to do everything well. At the Olympics, if you run the 100 meters well, you don’t have to do the shot put .” Some companies are just too hard to understand. Please don’t feel that you have to put them in your portfolio.
Trial & Error
It takes time to find your perfect number? You don’t have to diversify immediately into multiple stocks. You can start by investing in one company, then a different company the next time. Repeat until you start to struggle to stay up to date with the relevant news for your stocks.
If you can’t manage to read quarterly reports on your stocks, it’s a sign you have too many stocks in your portfolio. Look at scaling back to a manageable number.
My gut feeling is that once you exceed 20 stocks, you are stretching yourself. It also begs the question, why invest in individual stocks? You might be better off investing in an index fund — and save yourself the hassle of tracking individual stocks.
Remember that the number you end up with is personal to your circumstances. Don’t let peer pressure force you into holding stocks in your portfolio outside your comfort zone.
This number of stocks will vary as your circumstances change. An empty-nester has more time than a single mum. I have four stocks now, but I might add more stocks in the next couple of years. It will depend on my investing style, time, capital, and competence at the time.
Whether or not I got that vasectomy is personal, the same way that the number of stocks on my portfolio is personal to you. Good luck.
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