Are you a self-directed investor confused about how many stocks you should include in your portfolio? The general rule is to aim for a well-diversified portfolio. This ensures that no single company has an outsized impact on your holdings.

In todays article, we will look into the ideal number of stocks and their importance in diversifying your stock portfolio.

What Is A Good Number Of Stocks To Own?

Several studies have shown that diversification helps spread your risk across different companies and industries. It is recommended that stocks be owned by 20-30 different companies. If one company performs poorly, the good performance of other companies can help counterbalance the losses.

Besides, the ideal number can also vary depending on your investment goals and risk tolerance. Even 10-15 stocks in different sectors can provide decent diversification if you have a smaller portfolio. However, a more extensive portfolio requires the higher end of the 20-30 range, or even slightly above, to achieve a more aggressive diversification strategy.

The Importance of Diversifying Stock Portfolio

The golden rule of investing is "don't put all your eggs in one basket." It is crucial to spread your investments across various stocks to avoid any major setbacks. Several good reasons will encourage you to keep diversifying your stock portfolio.

Protects Against Market Fluctuations

Markets are cyclical, with periods of growth followed by downturns. Different industries tend to react differently to these cycles. For instance, during a recession, consumer staples companies might hold steady, while cyclical sectors like construction might decline.

Diversification ensures you're not overly exposed to any one sector's performance. When one sector dips, others might hold strong, offering a buffer for your portfolio.

Enhances Long-Term Returns

Diversification allows you to capture opportunities across various sectors. By not putting all your money in a single company or industry, you open yourself up to the potential for higher returns across the board. While high-risk, high-reward stocks might be tempting, a diversified portfolio has the potential for consistent growth over time.

Promotes Peace of Mind

Diversification allows you to take a long-term view, focusing on your overall investment goals without getting caught up in short-term market gyrations. Knowing your portfolio isn't reliant on the success of a single company provides an immediate sense of relief. Market fluctuations become less stressful when you know your investments are widely spread.

What Is The Point Of Owning A Stock?

There are two primary reasons why people own stocks: the potential for capital appreciation and the generation of passive income.

Capital Appreciation

It refers to the increase in a stock's price over time. When you buy a stock, you're essentially buying a piece of ownership in a company. If the company performs well, its stock price is likely to rise. By selling your shares at a higher price than you bought them, you can earn a profit.

Passive Income

Many companies share a portion of their profits with shareholders through dividends. Dividends are cash payments distributed regularly to stockholders, typically quarterly or annually. While not all companies pay dividends, they can be a valuable source of passive income for investors.

How to Diversify Your Investment Stock Portfolio?

Invest across sectors with different niches instead of picking stocks from the same industry to ensure your portfolio isn't overly dependent on any single sector's performance.

Moreover, you should choose stocks that align with your risk tolerance and long-term goals. For example, If you're daring and willing to take higher risks, growth stocks with high growth potential may sound appealing. Right?

If you are just a beginner, value stocks of established companies with solid financials can provide stability. Besides, before making any decision, thoroughly investigate the characteristics of various industries.

Always avoid investing in cyclical industries like construction or retail, whose performance is closely tied to the overall economy. Initially, you can consider investing in the healthcare or consumer sectors as they are more stable with steadier demand regardless of economic conditions.

Is Owning 100 Stocks Too Many?

It is unnecessary to make your portfolio this large. 100 stocks will bring 100 new problems that can cause significant losses. We will discuss 3 major reasons why this is not a good idea!

Management Burden

You need ample time and effort to effectively manage 100 stocks. For each holding, you'd need to stay updated on company performance, and industry trends. Can you spend 24 hours scrolling through the performance of different stocks? Of Course not! This can be overwhelming and stop you from making informed decisions.

Minimal Returns on Diversification

No doubt, diversification is crucial but you need to understand that it offers minimal benefit after a certain point. Studies suggest that a graph of diversification benefits plateaus around 20-30 stocks. If you want to suffer high losses, own 100 stocks only then.

High Transaction Costs

Everyone hates transaction costs. Sounds Relatable? Buying and selling 100 stocks can bring huge transaction costs, especially with commission fees. Over time, these costs can eat into your returns like termites eats the wood.

How Many Stocks Should I Own As a Beginner?

There is no one-size-fit answer for this but a good starting point for beginners is often between 10 and 15 different stocks. This way you can diversify your portfolio without getting entangled in the complexities. You can definitely increase the number of holdings once you become an experienced investor. You might be the next Warren Buffett! Who knows?

Keep in mind that if you have a smaller investment account, commission fees can hinder your path to holding a large number of stocks. In this case, focusing on fewer, high-quality stocks can be a good strategy.

Final Words

If you want to invest in individual stocks, it is necessary to discuss all your queries and goals with an experienced financial advisor. By now, you are aware that the sweet spot lies between 20-30 stocks but if you are already an experienced investor, a maximum of 50 stocks can be fruitful too.