How Many Stocks Should You Own?
No Hard-Wired Numbers
There are no hard-wired numbers. Obviously, owning just one stock is very risky: any stock can go down to zero at any time for any reason. Holding two stocks cuts your risk in half. But will owning 40 stocks provide iron-clad protection without limiting the upside? The more stocks you own, the closer you get to market returns. That's why most mutual funds cannot outperform the market: they are the market, with 100 or 200 stocks in their portfolios!
Limits of a Mechanical Formula
Some suggest limiting your portfolio to a set number of stocks (5 or 10). If a sixth buy candidate comes along, you sell one of the 5 stocks you already own to make space for the new candidate. This method supposedly forces you to upgrade your portfolio only if you find something better than you already have. The problem with this approach is that it assumes that
- the markets are linear and the number of profit opportunities remains constant, and
- you cannot always accurately assess a stock's profit potential.
But the market is never simple or clear. Suppose the stock you sell goes on to become a tenbagger while the new buy flops? Or that the sixth stock you decide against is the one that becomes a huge winner, without you in it? Or what if the market is so bad that there are hardly any stocks to buy - should you still own the best 5 stocks you can find even though none is going up?
Let the Market Decide
The best way is to let the market decide how many stocks to own. The only decision you have to make is how much to put into any one stock. Suppose you have $100,000 to invest. If you decide to limit your exposure to any one stock to $10,000, you may own just one stock and have 90% of your portfolio in cash in a bad market, and carry up to 20 stocks on margin in a good one, dramatically increasing your chances of finding the next tenbagger.
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Published by Slav Fedorov
Full-time stock trader and founder and managing member of TradingZoom, LLC, a provider of timely stock picks to part-time traders. Former banker, stockbroker, financial planner, with over 20 years market ex... View profile
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- Do not have a set number of stocks to own.
- Limit the amount of money you put in any one stock.
- Let the market decide how many stocks you own.