How Many Stocks To Buy?
The ideal number of stocks in a portfolio varies depending on several factors, including: risk tolerance, diversification strategy and portfolio size. All three factors are equally important to build a strong investment portfolio.
Risk Tolerance
Risk tolerance level varies from person to person. Some investors only invest in very few companies that they have high convictions of and do very well but for majority of the people, properly diversifying in at least 10 companies is crucial. You have probably heard this saying many times “Don’t put all your eggs in one basket”
This quote in financial world means, if you invest all your money in 1 or 2 companies and something goes wrong with them then you will loose all your money. It is as practical and scary as it sounds. That brings in the next factor.
Diversification Strategy
Investing in only 1 or 2 companies is very risky, at the same time investing in a single sector of companies is very risky as well. For example, when COVID 19 started, the entire airline and leisure industry suffered for a long period of time because people were barely traveling. Now imagine if you had only invested in Airlines, Hotels and Cruises. You would have been in a big loss, since most of your businesses were either closed or were not making any money. During that period Technology, Healthcare, Media and Gaming industries were booming.
Portfolio Size
Portfolio size matters as well. If you are starting with a $5,000 or a $10,000 portfolio it wouldn’t make sense to buy 30 companies as your average return of those companies combined will not be satisfactory. At the same time if your portfolio is $100,000 then investing in 10 stocks only will be too low as you won’t be able to grab opportunities that come and go every now and then.
Strategy in Building a Strong Portfolio
As you’ve read in my about me page that I have only learned how to properly invest after loosing money for almost 4 years. Following a set of rules helped me get out of the loosing streak and taught me to build a portfolio that I believe is a low risk high reward portfolio.
How many stocks to buy?
With a small portfolio of $20K or less, investing in at least 10 companies is a sweet spot. From $20K to $100K, at least 15 to 20 companies will give you the best results. Portfolio of $100k or more 20 to 30 companies would be ideal. More than 30 companies will be too much to keep track of. If anyone wants to invest in more than 30 companies, might as well buy the S&P 500 index fund and invest tension free.
How many sectors of companies to buy?
There are a lot of sectors such as Technology, Communication Services, Consumer Discretionary, Consumer Staples, Healthcare, Financial Services, Industrial etc. Follow my Watchlist page to learn more about these sectors.
In past 2 decades technology and communication services sectors are the best performing sectors. If you look at the trend, these 2 sectors will continue to outperform. Hence in my Portfolio, I have about half of my investments in these 2 sectors. At the same time I have invested in some Consumer Discretionary, Consumer Staples and Healthcare stocks as well to properly diversify my portfolio.
High Growth Low Growth?
Growth is another key factor to keep in mind. High quality-high growth stocks give the most returns on investment. High quality-low growth stocks protect the portfolio from volatile market environments. Most of the stocks in my portfolio is growing at least 20% per year in terms of revenue. Those are considered high growth stocks. For a portfolio of 15 companies at least 10 of them should be high quality high growth companies.
Dividend Investment?
Dividend investing is a way to earn cash flow from the companies that pays dividend every quarter. It is a great way of investing if your goal is to earn cash flow only and not focus too much on high return on investment. Usually companies that pay high dividend, their stock prices barely grow that much. Coke is a good example. On the other hand companies like Apple and Microsoft pays a small dividend but their stock prices are growing at 15% to 20% on average every year. So it’s up to the investors what they are comfortable with.
Equally Distribute Money Amongst Companies?
If I was starting from the beginning again with a $10k portfolio, I would buy at least 10 stocks and invest $1000 in each company. After that, as I put in more money to invest each month or few times a year I will keep buying each of these companies evenly or buy more of the high quality high growth companies that are selling for cheaper than their intrinsic value.