While it may appear that many people have an opinion on the “correct” number of stocks to have in a portfolio, the truth is that there is no single correct answer. The right number of stocks you should have in your portfolio is determined by a variety of factors.
These include your country of residence and investment, your investment time horizon, market conditions, and your penchant for reading market news and reviewing your holdings.
Understanding the Appropriate Number of Stocks for a Portfolio
Investors diversify their assets across a variety of investment vehicles in order to reduce their exposure to risk. Diversification, in particular, enables shareholders to lessen their exposure to unsystematic risk, which is characterized as the risk associated with a specific company or industry.
The number is around 20 to 30 stocks for investors in the United States, where stocks move around on their own (are less correlated to the overall market) than they do elsewhere. Research in this area was done before the evolution of online investing (when commissions and transaction costs were much higher), and most research papers put the number between 20 and 30.
Recent research indicates that investors who take advantage of online brokers’ low transaction costs can better maximize their portfolios by holding closer to 50 stocks, but there is no consensus on this.
Remember that these claims are based on prior, historical data of the overall stock market; there is no guarantee that the market will demonstrate the same characteristics in the next 20 years as it did in the past 20.
Most retail and professional investors, as a general rule, hold at least 15 to 20 stocks in their portfolios. If the prospect of researching, selecting, and maintaining awareness of 20 or more stocks intimidates you, consider using index funds or exchange-traded funds (ETFs) to provide fast and easy diversification across different sectors and market cap groups, as these investment vehicles effectively allow you to buy a bunch of stocks in one transaction.
