When you diversify your stock portfolio, the goal is to reduce risk and gain exposure to as many market segments as possible. This increases your chances of finding a winning segment while protecting yourself from any declines. Your other holdings may make up for the declining investment. The problem with diversification is you need to know how much is enough. You can spread investments so thin that you don't have enough in any one segment.
One way to determine how many stocks to own is to think about the percentage you want in each stock based on your risk tolerance. For example, 2 to 3 percent of your portfolio in any one stock provides a cushion -- if a stock fails, you won't have so much of your money tied up in the investment that you are ruined. On the other hand, those who tolerate more risk invest a higher percentage in each stock. For example, if you have a $100,000 portfolio, and invest 10 percent in each stock, you would own 10 stocks. This increases your risk, but also improves your chances of profiting from a winner. The percentage in each stock is up to you, so give a lot of thought to your own risk tolerance and the chances you want to take.
You can decide on how many stocks to own based on the amount of time you have to dedicate to following your investments, keeping up with the news about the companies issuing the stocks and reading about economic trends. Seeking Alpha points out that if you have about 20 hours per week, you can probably research and follow about five stocks. You can adjust the number of stocks according to your available time. No one can tell you how much time to spend on research and tracking, so you have to choose the number of stocks you own according to your personal preference for how much detail you want to study on each stock.
Picking a Number
Investing expert Burton Malkiel, author of "A Random Walk Down Wall Street," found that it takes 50 stocks to get the full protection of diversification. Roger Nussbaum of Seeking Alpha and Gary Kaminsky of CNBC suggest 30 stocks maximum. With the experts providing such a wide range, you have to rely on your own judgment. Look at the range given by Malkiel and Kaminsky, and adjust it according to your own sense of how diversified you really need to be based upon your own financial situation.
Mix it Up
The Winning Investor suggests that you diversify by adding exchange-traded funds and mutual funds to your portfolio. Both of these vehicles invest in a wide variety of stocks, so you get the protection of diversification while avoiding having to research and follow each individual stock. This approach allows you to invest in individual stocks with the rest of your portfolio. This kind of blend in your portfolio can free up some of your research and tracking time, because mutual fund managers and exchange-traded fund managers do a lot of that work for you.
Video of the Day
- Jupiterimages/Comstock/Getty Images