How Many Stocks is Too Many Stocks: Portfolio Diversity 101


For long term investors, everything is a waiting game. Once you buy into a stock, you just have to sit back and watch what that stock does in terms of its value. Sounds easy, right? It really is not, see, you have to keep track of every stock you own and this can start to overwhelm people. So, how many stocks should you own as a beginner? 

Investors and traders should have no more than 15 stocks in 1 portfolio, beginners should focus on building small positions in no more than 5 companies for simplicity when learning, someone looking to save for retirement wants more diversity to reduce risk.

There is a lot more to it than that. For investors, especially beginners, knowing as much as you can is key to your success in the stock market. In this article, we are going to tell you everything you need to know about portfolio diversity. So, if you want to have the best chances for success, keep reading.

How Many Stocks Should You Own

For a lot of people, the answer to this question is different but we will just be focusing on the two types of investors, those that have experience, and obviously those that are just starting out.

As we mentioned above, a beginner should have no more than 15 stocks in their portfolio. For somebody who has more experience, anywhere from 20 to 40 stocks is a good number. You will find that even experienced investors try and stick to having no more than 20 to 25 stocks.

If you are a beginner and you are trying to get a head start, you might be thinking to yourself, well why don’t I just get more stocks. That is what an experienced investor would do, right? Surely if you copy what they do, you should have a head start. Well, no, not really.

If I am being completely honest with you, thoughts like that are what causes a lot of investors to fail early on in their journey. When it comes to investing, taking your time, and learning everything that you need to know is crucial. Try not to be in a rush because, in the long run, you stand to have more success by being patient.

Feel free to check out this post that we did on the importance of having a stock market strategy.

Why it is important to limit the number of stocks you invest in.

It is important to remember that when you are investing in stocks, you are spending money and hoping that the market goes in an upward direction. While the chances are more likely that the market direction will go in your favor, some stocks might not. They could do the complete opposite and you can lose a lot of money.

You need to limit your number of stocks so that you can keep track of every stock to see how it is doing. For long-term investing, you do not have to check up as frequently as short-term investors but at the end of the day, you still need to keep track. This can start to become tricky especially for beginners.
Having too much stock also creates a lot of room for error. Perhaps that error won’t be on your part but rather on the fluctuations of the stock market. Too many stocks can also cause you to make emotional decisions when the stock market drops or rises.

How Many Shares Per Stock Should You Own

This question will actually lead us into our next section about diversifying your portfolio but it is possible to give you an answer right here. The answer depends on your situation. Let’s get into it.

If you have a certain amount of money that you are going to invest but you want to end up having a portfolio of 10 stocks, well, that gives us a number to work with. Now all you need to do is divide the total amount of money you have by 10. So, if you have $10000 to invest, that gives you $1000 to spend per stock.

If you have a certain amount of money to spend but are willing to take it slow and steady in regards to how many stocks you buy, then I would say, split your money between at least 5 different stocks. Then you can build up slowly from there until you have reached the number of stocks that you want.

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Diversify Your Portfolio

Diversifying your portfolio is probably the most important thing that you can do as an investor. In fact, it is as important as having a stock market strategy. There are a number of things that you need to consider when diversifying your portfolio but in this section, we are going to be discussing why having a diverse portfolio is important.

  • Do not risk all your money in one stock.
  • Diversifying your portfolio can yield higher returns.
  • More opportunity to pick winning stocks

Now that we have highlighted 3 reasons for why you should diversify your portfolio, let’s take a deep-dive into each of these reasons.

Do not risk all of your money on one stock. 

One of the biggest attractions of being a long-term investor is that the stock market is constantly going up with inflation. This makes it very hard to fail but with that being said, it is unfortunate that some companies can take such severe losses that they are unable to ever recover.

If you were to invest all or most of your capital into one of those companies, you could become one of the investors that loses everything. Diversification acts as a safeguard against this. It is pretty much that simple, investing everything you have into one stock is extremely dangerous and risky.

Diversify To Yield Higher Returns

When you have a diverse portfolio, what you are doing is basically creating a safety net for instances where certain stocks are not doing so great in any given quarter. This will happen regularly but because you own multiple different stocks, you might still be able to yield good returns.

This is why you will be giving yourself a great opportunity to constantly gain returns on your investment. While one stock is underperforming, one of your other stocks might be doing great. So, you would have yielded higher returns than what you would have if you just relied on one or two single stocks.

More Opportunity To Pick Winning Stocks

Diversifying your portfolio means that you have the opportunity to pick winning stocks in order to yield higher returns from your investments. While that is completely true, we must remember that each stock that you do buy, should be well-researched. You should never buy stocks just for the sake of diversifying your portfolio.

Can Your Portfolio Be Too Diverse

The more diverse your portfolio becomes, the harder it is to keep track of everything, and the easier it becomes for an investor to start making mistakes. A portfolio that is too diverse might also take one of the positives of having a diverse portfolio and turn it into a negative. I am of course talking about the opportunity to pick winning stocks.

Having a portfolio that is too diverse can have the risks of the Investor choosing losing stocks because I can only assume that somebody who is buying a lot of different stocks, might not be doing sufficient research into the stock that they are buying. Thus the investor might end up with a portfolio of too many bad stocks.

Portfolio Diversity: What Are The Different Types Of Stocks

A good portfolio will have, not only a diverse set of stocks, but it will also have diversity in terms of the type of stocks that it has. knowing the different types of stocks can help you make better-informed decisions when you are looking to invest. So let’s talk a little bit about some of the most common types of stocks and what they are.

  • Blue-chip: This includes some of the categories listed below. Investing in Blue-chip stocks simply means investing in companies that are already established such as Nike, Amazon, Coca-Cola, and so on.
  • Tech: This would include investing in companies like Microsoft, Apple, Facebook, IBM, Nvidia, and AMD. 
  • Retail: There is still a huge demand for retail stores even though it seems like Ecommerce is becoming more popular.
  • Ecommerce: This would include investing in companies like Amazon, Shopify, and any online store.
  • Commodities: Commodities consist of raw materials such as Gold, Platinum, and oil.

There are so many more types of stocks out there but what we tried to do with the list above, is just to show you that you do not have to invest everything within the same industry. A good portfolio will have different stocks within different Industries.

Once you know what type of stocks you are going to be looking at buying, it is good to use your investment strategy to find winning stocks within each industry. Commodities have for the longest time being one of the most common stocks for investors to buy but recently it seems like the tech industry has been the go-to for many investors.

What Should You Do If Your Stock Goes Down

This section will be brief but it is important. Because you have no more than 15 stocks, you have been able to keep track of your entire portfolio. Unfortunately, you have noticed that one of your stocks is going down, so what should you do?

If your stock starts going down, you need to do as much research into why it is tanking. Then you will be able to decide what you should do but most experienced investors would leave the stock. This is because they know that sooner or later, the stock will go into an upswing again.

Portfolio Diversity: Things To Consider

We have almost reached the end of the article and I thought it was important to highlight a few things that any investor, whether you are experienced or if you are a beginner, should consider. So, keep reading because these considerations could help you in the short or long term.

Try Not To Bet Against Your Current Stock

One of the main reasons I highlighted the different types of stocks that you get and especially the different types of industries that you could diversify your portfolio with, is because you don’t really want to bet against stocks that you already own. Allow me to give you an example of this.

Let’s say that you have two competing companies in the social media space. We already know of two that competed against each other, that was Facebook and MySpace, we all know how that turned out for Facebook and for MySpace. If you had invested in both companies, you would have lost money on MySpace.

This means that it would have taken you a long time to start seeing a return on your total investment within the social media space. This brings us to the next consideration.

Do Your Research

Doing your research is crucial before you decide to invest in anything. This also includes blue-chip stocks because you never know what can happen in the next few weeks, months, or years. Here are a few things to look out for when doing research on a company.

  • Its annual growth over the past few years. This is obviously a great indication as to where the company is going. 
  • If they have any upcoming products or services that seem as if they can be successful.
  • Check for any news and/or controversy surrounding the company and/or any key employees.
  • Check on their competitors. A good example of this would be Nvidia and AMD. They both manufacture gaming hardware and they have been competing with each other for years now.
  • Its current market position. You do not want to buy into a stock when it is currently sitting at a high, wait for it to drop a little bit. You can also monitor its history to make better predictions about where the stock is headed.

Watch Out For Broker Commissions

It used to be that a lot of brokers used to use percentage when it comes to the commission. That is not so common any more because now brokers like to use a flat fee per trade. This is why it is best if you don’t split your trades when buying the same stock.

Let’s say you have two thousand dollars that you wish to invest in Apple. Make sure that you invest those two thousand dollars in your first trade rather than splitting it up. If a broker charges $50 commission per trade, you could end up spending $100 on commissions just because you split up your trades into two.

Make sure that you negotiate the best deal with your broker and if you are struggling to find brokers that do negotiate, then the best thing for you to do is to find a broker with a good reputation that doesn’t charge you an arm and a leg per trade. 

Conclusion

In this article, we stressed the importance of diversifying your portfolio, however, we did go a little bit deeper than that into the topic. I would say that the goal of this article would be to better inform beginner investors and to reinstate some thoughts into experienced investors. Be sure to bookmark this page and use it as a reference.

We learned that for beginners they should never go above owning 15 stocks. We did explain why in the article and hopefully you will take this advice and start your investment career in the right direction from the start.

When it comes to investing, there is always a learning curve but I believe that with proper preparation, you can enter the stock market being more confident that you are going to make the right decisions. This is obviously so that you can yield good yearly returns on your investment, instead of losing a lot of your money like so many people do who rush into this.

Chris Race

I am an accountant from the U.K. specialising in Management Accounting, Personal & Business Tax, Financial Analysis, and Wealth Management. My passion for learning is what lead me to creating this blog. Stock market investing has always been a interest of mine, and since I was 18 years old... This interest has become a source of income for me and my family.

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