Putting together a comprehensive stock portfolio is not easy, especially when different sources make conflicting recommendations. For example, passive investors tend to recommend holding Vanguard's VOO or VTSAX or another equivalent fund and sticking to them for the rest of your life. More hands-on investors recommend owning between 12 to 18 stocks. Still, others say 20 to 30 stocks is the optimal number.
While this is not something you may want to hear, there is no right answer. The optimal number of stocks you should own depends on many personal factors, including your investing goals, time horizon, appetite for risk, and understanding of the stock market. However, a core piece of the puzzle involves diversification, which will help mitigate risks by spreading your capital across different assets.
- The general rule of thumb is to diversify your portfolio, meaning you investing in a variety of assets rather than putting all your money into one or two stocks.
- There are no limits to how many stocks you can own, but if you are a beginner, focus on finding quality stocks to invest in rather than quantity.
- If you are a passive investor, consider investing in index funds or ETFs that cover entire markets or industries.
- Before investing, think about the time horizon of your goals, how much time and effort you want to put into investing, and the costs of your investments.
What Is Diversification and Why Does It Matter?
In the context of stocks, diversification means investing your money into a variety of different companies. For example, instead of going all-in on Apple or Tesla, you would buy shares of Apple and Tesla alongside other stocks or funds to diversify your portfolio. An easy way to instantly diversify your portfolio is to invest in index funds or ETFs, which give you exposure to companies in different industries and sectors.
Diversification also applies to investing in different asset classes outside of stocks. Other securities to consider include bonds, real estate, commodities, and cryptocurrencies. If you are only investing in stocks, your portfolio can take a significant hit during a bear run. However, if you have bonds, that could offset some of your losses because bonds tend to do well when the stock market is bearish.
The benefit of diversification is that it allows you to spread your risk across different assets and hedge your bets. Not every stock you add to your portfolio will be a winner. Investing in many stocks will ensure that your money is not overly concentrated in any single stock.
How Many Stocks Can You Buy?
The number of stocks you can buy will depend mostly on your budget. If you have millions of dollars, it's much easier for you to add tens or hundreds of stocks into your portfolio than if you have $20. I actively hold between 20-30 stocks in my investment portfolio, but I have around 50 stocks on my watchlist. In an ideal world, I would invest in every single company on my watchlist. But, because I have limited capital, I have to choose more methodically.
Day Trading Rules
Another factor you should take into consideration is day trading rules. If you are a pattern day trader, someone who day trades more than three times a week, you have to follow the day trading rules set by FINRA (Financial Industry Regulatory Authority). If you break the rules, your account could get temporarily suspended by your brokerage firm. Pattern day traders must have a minimum of $25,000 in their account at all times and can only trade using margin accounts. Your broker may also have specific rules that you need to abide by that could be more stringent.
Can You Own Too Many Stocks in Your Portfolio?
While you want to maintain a diversified portfolio, there may be a point where you have too many stocks in a portfolio. Holding too many different stocks can hinder your performance if you become too spread out too early. For example, if you do not have much capital right now, it may make more sense to pick a few stocks to invest in first and see how they do. By starting smaller, you decrease the risk of spreading yourself too thin. Portfolio management also becomes much more difficult if you have to monitor more stocks than you can handle.
For beginners, the focus should be on quality rather than quantity. When I first started, I had less than five holdings in my portfolio. However, they were stocks I had a high conviction on and performed well since my initial investment. As I accumulated more money, I started broadening my portfolio to incorporate more companies I had researched on.
If you are a beginner investor, focus on your investing goals and invest in stocks that reflect your objectives. I am big on tech and growth, so I have a high concentration in growth stocks in my investment portfolio. However, I also balance my overall portfolio by investing in total market and international market funds in my Roth IRA and 401(k). For other investors, investing in stocks that pay dividends may be a better strategy, especially those interested in building passive income streams. If you are eyeing retirement, then holding value stocks or blue-chip stocks will make more sense.
Everyone's financial objectives will vary, so our definitions of what stocks are the "best" and how many stocks we should own will be subjective. Investors with concentrated portfolios can do very well if they pick the right stocks at the right time. If you are unsure where to start, the general rule of thumb is to have a basic understanding of the companies you are investing in and why you are investing in them.
Individual Stocks vs. Funds
A popular approach among passive investors is to invest in index funds and ETFs that track entire industries or markets. Invented by Vanguard Group's founder, Jack Bogle, index funds are a way to give investors a cost-friendly way to invest in the broader market. With index funds and ETFs, you can invest in funds that track specific sectors, such as healthcare, energy, technology, or funds that track the entire market, such as the S&P 500 or Total Market Index.
While funds are much more diversified, they are not as sexy compared to individual stocks. With individual stocks, you can get outsized returns quickly and see your stocks grow more than 100% in days or weeks. For example, I started loading up on AMC back in January 2021 when it was $5. Now, months later, I'm up more than 200%. Though I do not recommend going all-in on "meme" stocks, they are more entertaining to watch than an index fund or ETF.
We'll go over a deeper dive into the benefits to individual stocks vs. funds, though note that they are not mutually exclusive. You can invest in both depending on how much time and effort you want to put into the stock market.
When it comes to picking individual stocks, your portfolio can have a much higher growth potential if you choose the right ones. If you invest early into stocks with strong revenue potential, you can see returns of 300% or more in a short period. For example, if you invested in Enphase a year ago and held, you would have over 450% returns today (as of June 2021). If you invested in Nio a year ago, you would have over 600% returns today. Compared to VOO, you would have had slightly over 100% returns - which is a significant difference.
As hinted early, investing in individual stocks is a lot more fun. I genuinely enjoy discovering new companies and looking through their products or service offerings. For example, I recently learned about genomics companies, such as Crispr Therapeutics, which opened a new door of information for me. As someone who never really liked science, I am excited about the future of genomics and its potential. As a lurker on Reddit's Wall Street Bets and several Discord stocks servers, I also enjoy throwing some of my money at meme stocks to see where they go. Of course, I fully understand the risks, so they are only a tiny percentage of my overall portfolio.
The stock market is highly volatile, so when you invest in individual stocks, there is no bottom. I've seen stocks tumble more than 50% after bad news came out, particularly biotech and pharmaceutical stocks. Some of my stocks have fallen rapidly since their highs for reasons out of my control. When you pick stocks, sometimes it may feel like you are playing roulette where your chances of winning are high, but so are your chances of losing.
Additionally, investing in individual stocks takes time and effort, especially if you plan on holding for a long time. For most of the companies I've invested in, I have at least a basic understanding of them. For each company that I plan on holding for years, I know what the company does, its competitive edge, and its story. I also look into data available on their websites and the Internet to check their historical performance, financial statements, market sentiment, etc. As a long-term investor, I believe there is a lot of value in conducting due diligence. However, not everyone has the time for this or is interested in personal finance.
Index Funds and ETFs
Investing in index funds and ETFs allows you to instantly diversify your portfolio and take the guessing game out of the stock market. If you have limited capital, funds are a great way to get exposure to the market without being overly concentrated in one company or industry. Warren Buffett, one of the most successful investors of our time, recommends the average investor to invest in S&P 500 funds, which track the 500 largest publicly-traded companies in the U.S.
You also have the opportunity to decide the type of investment you want to make. No matter what you are interested in, there is likely a fund out there that tracks the industry or market you want to invest in. If you are interested in clean energy, you can look into iShares Global Clean Energy ETF (ICLN) or Invesco WilderHill Clean Energy ETF (PBW). If you are interested in innovation and technology, look into Ark Investments. By investing in a fund that tracks an entire sector or market, you minimize your risks of choosing the wrong companies.
One of the best benefits of investing in index funds and ETFs is the low expense ratios. With funds becoming increasingly popular among investors, more and more brokerages, such as Fidelity and Vanguard, are coming up with zero expense ratio funds. Your account gets passively managed by someone else in the background for no cost, saving you time, money, and effort.
Some actively managed mutual funds charge exorbitantly high expense fees for their skills and expertise, which can eat away at your profits. Note that index funds are a type of mutual fund. For example, the Baron Funds charges some of the steepest fees in the market in exchange for higher returns. If you plan on investing in a mutual fund, be sure to look at the fees and compare their performance to the overall market performance. You can gauge whether you are getting a good return on your money or not.
With funds, you have less control over your portfolio. While you get to pick which funds to invest in, you do not get to choose the assets within each fund. You also face the opportunity cost of having limited exposure to other investing strategies. For example, if you invest only in index funds, you miss the opportunity of finding value stocks that have higher growth potential.
While you get the benefit of diversification with funds, you are not insulated from market corrections. When the stock market crashed at the beginning of the pandemic in March 2020, so did all the index funds and ETFs. Even if you are solely invested in SPY or VOO, you are vulnerable to market corrections.
Getting the Right Balance
Consider the time horizon of your investing goals. Longer-term goals, such as retirement, warrant different strategies than short-term goals, such as paying down your car or building an emergency fund.
Time and Effort
How much time and effort you want to put into your investing strategy will play a large role in the number of stocks in your portfolio. If you enjoy doing research, you may end up holding 20 or more stocks in your portfolio. If you prefer to passively manage your portfolio, you may end up just holding an S&P 500 ETF and a total bond market ETF.
Evaluate the costs associated with your portfolio. Some index funds and ETFs will have high fees that might not be worth it for you in the long run. After I realized that I was not getting great returns in one of the ETFs in my portfolio for its cost, I quickly swapped it out for a different ETF.
So, What Now?
There is no right answer in the number of stocks you should own. The right number depends entirely on your needs and preferences. What matters most is staying diversified and knowledgeable about your investments. Investing can be fun and exhilarating, but you should always make informed and educated decisions.