Investing is a way of building wealth and growing your portfolio, but one of the most important questions is how many stocks one should own. Your risk, return and overall strategy will be impacted by the number of stocks you own and understanding how many you should own should be researched before you begin investing.
The number of stocks you should own will vary based on numerous factors, including investment goals and risk tolerance. This article highlights different factors and circumstances that may dictate how many stocks you should own.
Understanding Portfolio Diversification
Portfolio diversification can be crucial to a successful investment portfolio. It balances out risk and reward through investment in various assets and stocks to avoid considerable exposure to just one type of asset.
Over the long term, this practice reduces volatility and risk in your portfolio. For example, investing in just one industry leaves your position at greater risk if that industry takes a turn because of unforeseen circumstances.
You can choose from a number of ways to diversify your portfolio. Investing in different asset classes or industries will reduce your risk in the event of a downturn. It can also increase your potential return as you are exposed to a number of different markets.
Investing in just one industry, no matter how confident you are, leaves you vulnerable as several unforeseen factors come into play.
Factors to Consider When Deciding How Many Stocks to Hold
If you are still pondering how many stocks you should hold, then it may be time to consider some of the factors below and how they fit your investment strategy.
Risk Tolerance and Investment Goals
Understanding risk tolerance and what you want to achieve when investing is crucial. Not everyone has similar strategies in mind. Whether you want to generate long-term growth, a steady income or rapid returns, your risk tolerance will be key.
Your investment goals and risk tolerance go hand in hand and play a vital part in the number of stocks you own.
Owning a wide variety of stocks across various sectors can reduce your risk. However, owning too many stocks in risky industries may increase your risk and lower your average rate of return.
Size of the Investment Portfolio
The size of the investment portfolio will realistically dictate how many stocks or shares one can reasonably own. Purchasing a stock comes at a specific price. Therefore, your account size will impact the amount you can own. According to some research, the correct number of stocks to own in a diversified portfolio is 25 to 30. However, for many, that will be too many, and for some, it will be too little.
If you are dealing with a smaller account size, the number of stocks you wish to purchase may be restricted. The better option may be to focus on a small number of stocks to build the size of your position rather than investing a small portion across multiple investments.
In comparison, a larger account size can open several positions that are distributed more evenly. Nevertheless, researching and understanding your positions will still be crucial in the long run.
Types of Stocks and Sectors
Understanding portfolio diversification is essential when considering how many stocks you wish to hold. Diversification brings a range of benefits. You could invest in small-cap, large-cap, growth or value stocks. Additionally, these stocks can be across various sectors and industries to reduce exposure to one market.
This practice will reduce the risk of over-concentration to a single sector or stock type and benefit your portfolio in the long run. This investment strategy may be more suited to those looking to achieve steady returns.
Time and Effort for Portfolio Management
Owning a large number of stocks can seem appealing, but achieving the best returns will require active management, research and effort. It can take a lot of time to stay informed on the latest news and developments across the markets and your individual investments.
Owning a significant number of stocks requires more time and research to stay up to date and reduce your risk in case of a potential decline in a particular stock.
Implementing Modern Portfolio Theory
Modern portfolio theory (MPT) is a method investors use to select the best investments with the best overall returns. The method uses a mathematical framework and an acceptable level of risk to build a portfolio that can achieve the most considerable returns.
The most important feature of MPT is diversification to achieve the best returns and minimize risk. Many investors are risk-averse, and investors can lower risk by investing in multiple asset classes. MPT then takes the expected returns of these asset classes to measure the overall return for investors.
MPT can build a better risk-reward ratio for your portfolio and help you develop the optimal number of stocks to achieve the best returns.
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Is There a Correct Number of Stocks?
Achieving the maximum return when investing is a goal on everyone's mind, leaving investors questioning how to improve their portfolios. The number of stocks a person should own comes down to the individual and their personal goals. Risk, reward, volatility and economic factors play a part in an investor's strategy.
Although no one can tell you the correct number of stocks to own in your portfolio, you may wish to follow the industry average, as anything too small may cause you to miss out on potential gains and anything too large may affect your risk.
Find the best stocks to invest in with Benzinga's expert analysts:
Frequently Asked Questions
How many dividend stocks should I own?
There is no correct answer to the number of dividend stocks you should own. For some, owning a large number of dividend stocks spreads risk and reduces exposure to just one market.
Is 20 stocks a lot?
Owning 20 stocks may not be a lot, depending on the investor. For many, 20 stocks in a portfolio is a good number. However, other investors have far more stocks in their portfolios depending on specific factors involved.
Is owning 100 stocks too many?
Holding 100 stocks in a portfolio would be too many for most investors. Although this method could provide diversification, it would probably be too difficult to manage well.
About Sam Boughedda, Stock Market Analyst
He is an expert in the following spaces: stock market news writing, analysis, and research.