How Many Stocks Should You Own in Your Portfolio?
One of the most common questions every stock investor faces is: How many stocks should I own in my portfolio? What is too few, and when does diversification become excessive?
Holding too few stocks increases the risk that a single underperforming stock could significantly drag down the entire portfolio. On the other hand, owning too many stocks spreads investments too thin, reducing the impact of a high-performing stock on overall returns.
Investors take different approaches to this question. Some link the number of stocks to their portfolio size, others base it on the number of attractive investment opportunities, and some even consider their age. However, there is no universal consensus on the ideal number of stocks in a portfolio.
This article aims to guide investors through this dilemma and help determine the optimal number of stocks for a well-balanced portfolio.
The Ideal Number of Stocks in a Portfolio
It’s well established that increasing the number of stocks in a portfolio enhances diversification, thereby reducing risk. Diversification ensures that stocks respond differently to market conditions, minimizing the chances of steep losses during downturns. However, there are certain practical guidelines that can help investors determine the right number of stocks:
Guideline 1: The Minimum Number of Stocks – At Least 2
To gain any diversification benefit, an investor should hold at least two stocks from different industries. This helps reduce risk compared to investing in just one stock.
Guideline 2: The Maximum Number of Stocks – Around 30
Research suggests that the benefits of diversification diminish beyond 20-30 stocks. Studies indicate that while adding stocks up to this range significantly lowers risk, the marginal benefit decreases beyond 30 stocks.
A well-diversified portfolio within this range effectively manages risk while ensuring that individual high-performing stocks still contribute meaningfully to overall returns. If a portfolio exceeds 30 stocks, the positive impact of any single winner diminishes, making it harder to generate superior returns.
Diversification Benefits Decline With Too Many Stocks
A study published in the Financial Analysts Journal demonstrates that adding more stocks beyond 30 does not significantly reduce risk. Instead, it unnecessarily complicates the portfolio, making it harder to track and manage.
Thus, investors are advised to keep their stock count within the 2 to 30 range to balance risk and performance efficiently.
Other Key Factors to Consider
Guideline 3: The Number of Stocks Depends on Your Ability to Monitor Them
Every stock in a portfolio requires regular monitoring. This includes:
- Reviewing quarterly earnings reports
- Reading annual reports
- Tracking company news and updates
If an investor cannot keep up with monitoring, their ability to respond to changing business conditions diminishes, increasing risk.
For practical portfolio management, an investor should own only as many stocks as they can effectively track.
Guideline 4: Own the Minimum Number of Stocks Necessary
The best approach is to own as few stocks as possible while ensuring adequate diversification. This strategy allows an investor to benefit from strong performers without spreading the portfolio too thin.
Legendary investor Warren Buffett follows this philosophy, as highlighted in his 1978 letter to Berkshire Hathaway shareholders:
“Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.”
Lessons from Market Crashes
Historical market crises, such as the 2008 financial meltdown and the 1998 Russia, Brazil, and East Asia crisis, have shown that diversification does not always protect investors during extreme downturns. During these periods, most stocks—regardless of industry—fell together, eroding the assumed safety of diversification.
Additionally, the collapse of the hedge fund Long-Term Capital Management in 1998 demonstrated that even a portfolio with over 6,500 investments could still suffer widespread losses.
The Final Takeaway
Investors should diversify enough to feel comfortable without overcomplicating their portfolio. If someone feels at ease holding 100 stocks, they may do so. However, the diversification benefit of holding 30 versus 100 stocks is nearly identical.
In fact, holding too many stocks may hurt returns since even a strong performer will have minimal impact on the portfolio’s overall gains.
The key is balance—maintain a portfolio that is large enough to manage risk but small enough to allow meaningful gains from winning investments.
