When you start investing in stocks, one of the biggest questions you might have is, “How many should I own?” You’ll hear from many experts that buying different stocks is important so you can diversify and protect against risk.
You may wonder if there’s a specific number that will give you the diversification you need. Here are a few steps to follow to get an idea of how many might be enough for you.
1. Understand why you need to diversify
Diversification means spreading your money across different types of stocks and other assets to reduce risk. If one stock doesn’t do well, the others might minimize any loss and could even generate overall gains.
When diversifying, understand that more isn’t always better. There can be such a thing as too much diversification.
This may happen when you own so many stocks that the reduction in risk becomes smaller and smaller with each new addition because they become more and more correlated.
To strike a balance, take a look at your portfolio to identify your specific needs and the industries where your stocks are coming from.
2. Think about your overall diversification needs
In general, different industries perform well at different times. Companies of varying sizes may also perform differently even if they’re in the same industry.
Because of this, diversification isn’t just about the number of companies you’ll invest in. The types of stocks you’ll own and their respective industries also matter.
It helps to revisit your portfolio periodically to see if there’s an opportunity to spread your investments across various companies, sectors, and – if your investment platform permits – even countries.
3. Examine the rule-of-thumb options
You’ll find contrasting expert tips and opinions on the right number of stocks to have in a portfolio. Some may recommend having at least 10, while others may claim 20 to 30 is better.
There’s no universal number that everyone agrees on because people have different experiences and objectives. Some may prefer having less to maximize growth while others may favor buying more to minimize risk.
Knowing the various rules of thumb can give you an idea of what has worked for other investors. Before following them, assess your own situation to know if they’re also relevant for you.
4. Consider your own situation
To balance risk and opportunity, it’s best to make informed decisions catered to your unique needs. Keep these in mind:
- Risk tolerance
The volatility of stocks can vary across different types. Blue chip stocks issued by large companies tend to be more stable, but they may also grow relatively slower.
There are also growth stocks that rise in value quicker than the others, but they can also experience steep declines. When choosing a mix of stocks, the associated risks must be acceptable to you.
- Goals
Your goals will also influence how many and which types of stocks you should own. If you’re investing for long-term goals, you might want to hold onto a diverse mix of stocks that you believe will grow over time.
If you’re aiming for short-term gains and can handle the risks, then buying and selling fewer stocks with high volatility may work better.
- Resources
If you’re buying individual stocks, you’ll likely need a lot of money to invest in different ones. You should also consider the fees that come with stock trading since they can eat into your profits, especially if you’ll transact frequently.
It can also take a lot of time to research your investment options. The number of stocks you’ll own may depend on the amount of time and money you can afford to put toward investing.
If you’re a new or passive investor, it may be easier and more affordable to invest in a lot of stocks at once via pooled funds like Unit Investment Trust Funds (UITFs).
With the right mix of assets, these funds may help you diversify and eliminate the need to pick many individual stocks.
Just remember that there’s no perfect number of stocks to own. It’s completely OK to start with a small selection then gradually grow your portfolio over time if that’s what fits you best.
Whatever number you’ll end up with, it must be a number that you understand and can handle and monitor on a regular basis.
