How Many Stocks Should You Own?

Been looking over your portfolio and noticing a bit of this, some of that, and a touch of whatever else you could find? Us too. If your portfolio looks more like a stamp collection — filled with one of everything — then consider simplifying your strategy. It will not only make your money easier to manage, but will also benefit your bottom line, according to CNN Money. They suggest a simple, two-part strategy for maximizing your investment returns…

1. Direct 90 percent of your U.S. equity allocation into a total stock market index fund that automatically gives you a stake in thousands of companies. That guarantees you a piece of every superstock that already exists or might emerge later – and, more important, it means you’ll be adequately diversified and your investing costs will be at rock bottom.

2. Pursue your search for the next Microsoft or Google by researching the daylights out of a very small number of companies and putting the remaining 10 percent of your portfolio into your one to three best ideas. This way you’ll let yourself have a little fun. You will also minimize your risk and maximize your hope.

We’re not sure “hope” is a valid investment strategy, but we know what they mean. It doesn’t take a massive, complicated collection of investments to do well in the long term, simply an easy, consistent, focused method of saving and investing.

How many stocks should you own? [CNN Money]

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  1. Notsewfast says:

    Also remember that owning lots of different stocks does not necessarily make you well diversified. You may have picked stocks based on tips from friends and family, but only have purchased domestic small and large cap growth stocks.

    To truly diversify (and get consistent returns) pick up some ADRs, Treasury notes, and (gasp) mutual funds (specifically market neutral or absolute return.) Also, try to buy some real estate, or simply a REIT.
    Do your homework, and don’t be closed off to things that you are told by the media you should avoid. You know what’s best for you. The most effective way to help your money grow is to diversify your holdings

  2. Beerad says:

    This post isn’t really “how many stocks you should own” as much as “don’t pick individual stocks, invest in index funds.” It’s the old argument of “if you think you can beat the market, you’re wrong.”

    Index funds provide a nice, easy way to invest in the capital-letters “Stock Market” because if the overall market rises, so does your investment. You don’t have to care at all about whether WidgetCo has a good or a bad day (or even year).

    On the other hand, if you have Warren Buffet-like acumen and savvy (or at least think you do), you’re probably most interested in picking individual companies that you think are undervalued (meaning their stock is priced lower than it should be) and that will be able to return a better investment over time than the market average. You’ll probably figure out after a few years if you’re good at this or not, and if you are you’ll probably have a lot more than 10% of your portfolio invested this way.

  3. Jacknut says:

    If you are going to buy individual stocks, you need to make sure that the there is a low correlation among the stocks you purchase. A classic example of this is Dell and Proctor and Gamble. If you look at historical returns for both stocks, you will see a general theme that has them moving in different directions over time. When Dell is up, P&G is down, or not moving up as quickly. When Dell is down, P&G is up.

    In any event, the maximum number of stocks an individual investor needs to own is somewhere between 30 and 40, depending on how well diversified the portfolio. Owning more than amount does not reduce risk.

    If you want more info on this, let me know.

  4. jamesdenver says:

    I prefer ETFs (exchange traded funds) Easier than mutual funds, and there’s plenty of foreign (rapidly growing) overseas funds to choose from.

  5. Rustjive says:

    That’s a disappointing article from CNN Money.

    Most of these ‘studies’ where they track the performance through the last x years looking at y factors are constrained to the US Equity markets. True diversification, especially in the face of a weak dollar, means you should be investing European markets, Asian markets, emerging markets, etc. Just putting 90% of your money in VTI and calling it a day is a pretty poor attempt at capturing ‘the market’.

    There’s really no substitute for research – understanding inflation, or why the US market isn’t particularly strong right now (despite rate cuts, see the record level of unsold homes on the market, or the aging of the population and the effects that will have on housing, etc.), or understanding the relative strength of foreign markets – it’s daunting, but it IS your money. Putting 90% of it in a specific market and 10% on hope just seems like poor form.

  6. cdan says:

    I try to manage my portfolio in less than 10 positions (including cash and index funds) with the goal of outperforming the S&P500. Including dividends, I’ve managed to outperform by 8.8% in the last twelve months, for a total return of 24.4%. As the pros say, past results are not indicative of future returns, and that kind of performance isn’t achievable every year, especiall y with a limited set of financial tools (no leverage, not derivatives).

    31.7% Cash (earning 3.5% tax-free interest)
    7.6% Weatherford International (WFT)
    14.3% Monsanto (MON)
    7.2% EBay (EBAY)
    6.3% Apple (AAPL)
    3.0% Morgan Stanley (MS)
    6.2% EMC (EMC)
    15.9% Berkshire Hathaway (BRK.B)
    7.9% Morgan Keegan High Income Fund (RMH)

  7. cdan says:

    @Beerad: Well said

  8. cdan says:

    @cdan: God that was horribly written – my apologies

  9. swalve says:

    @Jacknut: It’s not really a hard number, but how many different positions can you effectively manage? I can’t manage 30 different stocks.

  10. DeleteMyAccountPlease says:

    Don’t be afraid to look outside of the Total Stock Market for index funds. Historically, Value funds and Small funds tend to return much more.

  11. Jacknut says:

    @swalve: I’m not a financial professional but in my spare time, I “manage” 17 individual securities investments. By “manage”, I mean look at the proxies when they come every so often and look at the year end statements. I don’t really do much selling and my buying is automatic now.

    Forgive this digression into financial jargon, but the point of diversification is to reduce risk. There are two types of risk associated with any security: idiosyncratic risk (the risk that CEO is going to liquidate the European division in exchange for hookers and blow) and market risk (the risk that Congress one day is going to pass a whopping tariff on all imports because of all the hookers and blow they consumed at a CEO’s summer house). Diversifying within an asset class (stocks, for example) can eliminate the idiosyncratic risk of any particular asset. You can eliminate some market risk by diversifying among asset classes (stocks, bond, art, real estate, etc.), but there is some element of market risk that can never go away.

    That last bit is what kicks the hedge fund managers in the shorts. :)

  12. Blueskylaw says:

    @cdan:
    Will you sell your Berkshire Hathaway when the “Oracle of Omaha” passes?

  13. cdan says:

    @Blueskylaw: In the event that Mr. Buffet dies before handing over the reigns to Charlie (his successor), the stock will probably sell off enormously on the news. This would be a mostly irrational reason for selling, and the stock would likely trade at a value discount, in which case, I’d buy more (the lesson here being, you can’t always predict a sell-off, but you can always react smartly to one).

    The real struggle for me is how the company, in it’s current cash-bloated state, can find growth. Warren seems to not favor any kind of restructuring (splitting the company into a large low-risk unit and a separate, smaller, high-risk unit would be great for me), and why should he? He wants modest low-risk returns, which is what the company has been trending towards as it has gotten larger.

    I’ll also point out that I’ve made a bunch of huge mistakes in my own portfolio (sold some of my Apple stock too early – TWICE – and bought back in too late – ALSO TWICE!). That, and I failed to predict the sub-prime meltdown, which caused my RMH to trade down from $18 to $6. My reaction? I bought more. In December we’ll see if that was a good idea or not.