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View Full Version : Optimum Number of Stocks in a Portfolio


badcompany
12-15-2013, 01:00 AM
For me, it's around 12.

I've found this number is a good compromise between being aggressive while, at the same time, protecting yourself from individual stock risk.

With 12 stocks, equally weighted, each will be about 8% of the portfolio. Let's say you wake up one morning and find that the Feds raided the headquarters of one of your companies, and as a result the stock is down 25%.

That 25% works out to 2% of your bankroll. Certainly a bad day, but, not something that will take years to overcome.

Of course, this is just a guideline. It doesn't have to be exactly 12, and the stocks don't have to be equally weighted.


Btw, that Fed raid just happened to Lumber Liquidators.

reckless
12-15-2013, 10:45 AM
I am with you with a number such as 12 as being as ideal number of holdings for a diversified personal portfolio.

Too often, though, people simply make too many investments -- 20, 25 and sometimes more stocks. Well, if an individual needs to own that many companies it may be best to simply buy a well-managed, low cost mutual fund instead.

Another 'mistake' made by individual investors is confusing the raw number of companies owned with true diversification.

You are not really diversified if you own 12 companies and they are Coke, Pepsi, Facebook, Cisco, Microsoft, Intel, Apple, Google, Exxon, Hess, Marathon and Chevron.

An investor is better off buying stocks across six industries and having six good investments than having 12 companies across just 2-3 industries.

badcompany
12-15-2013, 11:50 AM
Good points. Lots of faulty assumptions in investing. Investors assumed they were better protected from a crash because they were diversified across the world. However, in 2008, foreign markets crashed even harder than the U.S.

"Diversification" is a subject that probably merits it's own thread.

RaceBookJoe
12-17-2013, 12:32 PM
The problem most investors have when they diversify is diversifying into either (a) crappy stocks or (b) crappy sectors. So you want to diversify wisely also.