Wouldn’t it be nice to know the ideal number of stocks you should have in your portfolio?
Unfortunately, that question is similar to wondering how many grains of sand are on an “ideal” beach, or how many hairs are on an “average” person’s head.
Ask a dozen experts, and you’ll get a dozen answers. But for everyday investors who don’t have endless hours to manage their portfolios, and who look at a modest stock investment as a worthwhile asset, there is certainly a reasonable way to construct a typical portfolio.
Five, Ten, or a Dozen?
Surveys say that the average U.S. citizen who owns at least one share of stock has a portfolio that contains securities from 3 different companies. Note that that’s an average, and it pertains to anyone who owns at least one share of stock.
For investors who actively manage their own portfolios, various conflicting sources tell us that 10 is the magic number, which makes more sense and seems at least intuitively wise. More companies means more diversity, and 10 is a larger number than 3.
But that still leaves us guessing because the data is merely descriptive, and only shows what average investors are doing, not what they should be doing.
What do the experts say?
According to the financial world’s gurus, the ideal number of stocks in an average person’s portfolio should be somewhere between 5 and 100. It depends on how much money is invested, how long the portfolio has existed, how old the owner of the stock is, and which expert you ask.
Here is what some of the more prominent soothsayers are saying about this endlessly debated topic. If you are an investor looking to optimize the number of stocks in your portfolio, the following information will either help you or confuse you, depending upon which experts are your favorites.
Expert Number One says, “20 to 30”
Cullen Breen of DutchAsset.com says that because so many portfolios contain index funds, the number of individual securities in an average basket might be as high as 200. Cullen explains, “Most portfolios own between hundreds or thousands of stocks because of the use of mutual funds, index funds, and various managed stock accounts. Diversification can be accomplished with a little as 20-30 stocks, without too much exposure to any one sector or company. As an alternative to buying an index, you could purchase 2-3 different high quality stocks every month and after a few years you would develop a robust portfolio.”
Expert Number Two says, “A Dozen”
Todd Campbell of the Motley Fool has a commonsense approach to divining the ideal number of securities to hold. He looks to Warren Buffet’s mentor, Ben Graham in reaching his own conclusion: “Personally, I think a dozen is probably the fewest number of stocks I’d own to insulate myself against the risk of one bad egg spoiling the bunch. That thinking is backed up by investing legend Benjamin Graham, who was Warren Buffett’s mentor and the author of The Intelligent Investor. In his book, Graham suggests that the sweet spot for investors is somewhere between 10 and 30 stocks.
Intuitively, that makes sense. Tracking 120 stocks would be a full-time job best left to portfolio managers with a team of analysts, while a handful of names isn’t likely to spread your risk around to enough sectors. After all, there are 10 sectors in the S&P 500.”
Expert Number Three says, “A few, plus index funds”
Brian Feroldi is another Motley Fool expert who points out the inherent value of using index funds as a way to gain diversification without having to do tons of research: “Investors who want to own individual stocks must be willing to do homework on the companies that they own in order to ensure that their theses are still on track. Thus, the more individual stocks that they own, the more homework they must be willing to take on, which can be a tall task for shareholders with limited time on their hands.
For that reason, I believe that investors should only own the number of stocks that they feel they can actively manage, even if that means they only own one or two stocks. Of course, holding so few investments will not allow for proper diversification.
The easiest fix is to keep the bulk of their capital invested in index funds, and sprinkle in a few individuals stocks on top. Following this strategy will allow investors to stay diversified, and keep their homework requirements to a manageable level.”
Expert Number Four says, “20 to 40 and/or an ETF”
David Krejca at Seeking Alpha spent a good deal of time studying historical research on this question and came to the following conclusion, “With respect to all the studies I have looked through, I would say that the ideal number of stocks to hold in a portfolio lies in the range of 20 to 40 depending on the circumstances. As legendary investor Peter Lynch pointed out, investors should be aware of negative consequences when their portfolios consist of too many stocks. After all, there is no point in constructing a portfolio with large quantities of holdings as one can simply buy an ETF that closely mimics the selected strategy benchmark.”
Expert Number Five says, “Between 5 and 10”
Jim Cramer, best-selling author and host of CNBC’s “Mad Money” is one of the most followed investing gurus in the world. His advice on this topic is astoundingly simple: “Unless you’re a professional money manager, you should own no more than ten and no fewer than five stocks in your portfolio. Any more than ten and you’ll have to spend too much time doing homework. You’ve got to spend at least a couple of hours a week on this kind of research.”
Is there a consensus?
Actually, considering that we consulted 4 experts and got a wide range of responses, there seems to be a general consensus that:
- You should only have as many stocks as you can research and follow
- It is wise to include index funds and ETFs in a typical portfolio
- It makes nice mathematical sense to have perhaps one or two stocks for each of the 10 sectors of the S&P
The bottom line: An index fund, an ETF and between 10 and 20 stocks for a given portfolio might be the closest we can get to a consensus answer to the question.
Remember, everyone’s investing goals are different, so this little exercise was more for educational purposes than anything else.
Maybe the only real “consensus” answer is: Find your own way, do careful research, and enjoy investing.