How many stocks are good enough for a portfolio?

Question

Hey guys. I enjoy investing in individual stocks instead of investing in ETF's or Mutual Funds. It's fun for me and I don't like spending money for the expense ratios. My question is..for anyone out there that knows how to build stock portfolios, how many individual stocks are recommended when building a portfolio. Also, does every sector have to be involved? Thanks guys!

Answer 1

The minimum number that is academically accepted is 17. 20 is a good number to start with especially if you have limited amount of financial resoruces to build a more comprehensive portfolio. Studies found that a diversified porfolio actually requires more than 30 stocks to work efficiently in the real world. One thing you must know that having 20, 30,40 even 50 stocks in your porfolio does not mean that the portfolio is truely diversified. What really matters is the correlations between each of the positions and their contributions to the overall mean returns and the standard deviation of the porfolio.

If you had experience with some famous mutual funds such as Janus 20 (a Janus fund with about 20 stocks in the portfolio) and Janus Olympus ( a mutual fund with more than 20 stocks) during the previous large cap/ Tech Stock bubble period...You should be aware of that such fund portfolios were not truely diversified at that time even they carried 20 or more stocks in . And you can check out their performance during the large cap/ Techstock down turn during the following years. The true problem with those portfolio was that the positions within the fund were highly correlated. So, you have to pay attention to this piece of measurement if you want to have a well diversified portfolio. Of course, without a good software, ordinary investors may find the task difficult.

But you can still use some simple rules to do the job.

1. Although it's not a "must" to cover every single sectors in a portfolio, make sure your portfolio is not too concentrated on any single sector and industry.
2. Try cover most asst classes and categories (large, small, mid, international, fixed income, real estate, precious metal and commodities etc.) in your portfolio according to your risk tolerance and return requirement.
2. Avoid any single position representing more than 5% of your portfolio asset
3. Make sure you have some foreign exposure which will dramatically enhance your diversification efficiency.
4. Do rebalance your portfolio at least every 3-6 months or when it's needed.
5. If your financial resources is limited ( let's say less than 200K), try to construct your portfolio using mutual fund and ETFs instead of individual stocks.

Hope this help.

Sal

Answer 2

It's "diversified" but the "Asset Allocation" is questionable at best. How does this fit in your portfolio? If you've got Mutual Funds in addition to this and the Asset Allocation is good..... these stocks could just be a small part of your portfolio. If these stocks are your entire portfolio.... you're breaking Rule #2 by not having a good "asset allocation". BTW: Rule #1 is having a risk management plan for each stock in your portfolio. Hard or soft stops are much better then having to make a decision in a stressful market downturn.

Answer 3

There was a story about this in one of the investment magazines a few years ago. Some company had the market divided up into X number of sectors and the author chose the best stock (in his opinion) of each of these sectors (some were combined for example: General Electric is in transportation {manufactures Railroad engines, Jet airplane engines}, consumer appliances, the electric power industry (nuclear plants and power turbines), and he came up with a list of 11 stocks to "cover the market." I think 11 should be a bare minimum.
If you notice, the diversified mutual funds that are "concentrated" on the managers "best ideas" usual have between 20 and 30 holdings (Janus 20 Fund for example).

Answer 4

According to Jim Cramer, former hedge fund manager, 5-10 individual stocks is ideal:
1. There is enough diversification (diversify over several sectors)
(more info on diversification here:
http://techfarm.blogspot.com/2007/07/how-to-play-am-i-diversified.html
)

2. Not too much that you can't keep track. According to Jim Cramer, you need to do homework and continue to study your position. Do you have enough time to keep track of all the stocks in your portfolio? 5-10 makes it more manageable.

3. Of course, if you have lots of time and energy, you can diversify up to 20 positions over many different sectors.

4. Positions size is important too. If it costs $10 to buy anfd sell, that's $20 in commissions. If your position size if $500, that is $20/$500 = 4%. Every trade you make, you'll lose 4% and you are spotting the market that 4%. So you want larger positions sizes, which affects your total portfolio size.

Good luck to you.

Answer 5

It depends on your tolerance for risk. In general the more stocks you own the more likely you are to get approximately the market return (unless you invest exclusively in one sector or size). For really outstanding returns I'd recommend buying a few stocks in industries you expect to do well-- you can make a lot of money, but you also take a much greater risk that you'll lose a lot or that you'll miss out on a rally in something else.

Very agressive: 1-5
Agressive: 5-10
Better than average: 10-15
A bit better than average: 15-20
Overkill: 20+

But that's just me--and I have a high tolerance for risk.

Answer 6

Hmm, if I owned some XOM, then I got a piece of the biggest single profit pot filler in the oil industry. If I got a piece of WMT, whatever you think of it, it is one huge and profitable retailer. Whatever you think of it, MSFT is one really, really rich cash cow. IBM, might be a fair substitute because of its enormous potential with new computing technology and pioneering nanotechnology work. As for one of the most important players in retail transactions clearing, you will want to have some MA. Agriculture is going to huge and POT is going to make much of it work. Finally, for the sake of making a short list short, add a fair chunk of GE for an amazingly diversified set of technology being put to profitable use.

In these there is enormous stability, tremendous and consistent profitability, and each is a superstar player in its corner of the world's economy. Everything else is fun icing on the cake.

Answer 7

i agree with the first answer, about 20 will spread it out enough to have some diversity,but not too many where you cant keep up with them yourself
but it can take alot of money to invest in 20 stocks and get enough shares to make it worth it

Answer 8

http://www.tradingzoom.com/riskmanagement

- read the part on position size and diversification. Let the market decide. If you follow this simple system, you'll be largely in cash in a weak market and fully invested in a strong one.

Answer 9

about 20 or so. try to spread them out in different sectors.