How Many Stocks Should You Own?

Lots of investors get hung up on the number of stocks they should own. Some think they need to have 50 or 100 to be “diversified.” Others say you need to be in only 10.

Investors have a habit of buying more stocks (and mutual funds) than they need to. Morningstar recently asked how many stocks you should own to be diversified:

Let’s hear from the experts. In their book Investment Analysis and Portfolio Management, Frank Reilly and Keith Brown reported that in one set of studies for randomly selected stocks, “…about 90% of the maximum benefit of diversification was derived from portfolios of 12 to 18 stocks.” In other words, if you own about 12 to 18 stocks, you have obtained more than 90% of the benefits of diversification, assuming you own an equally weighted portfolio.

Does owning only 18 stocks scare you?

I can hear your question already: what if one of them is Enron? Or Worldcom? What if I lose it all????

Let’s say, for instance, that you DO own an Enron among your, say, 20 stocks. If they are all pretty evenly distributed with $1000 each, you would lose $1000 on your Enron investment. Would it stink? Yes. Is it totally devastating to your overall portfolio? No.

If you invest in 20 stocks in a variety of industries (to give you diversification) you should be able to have a pretty healthy portfolio that is easy to track.

The problem with having 50 or 100 companies is that no one can track that many companies successfully. Even the greatest investors like Peter Lynch have said that 50 is the most they are able to follow at any one time.

Also, be careful of being overweight in any one sector. Back in the 1990s, investors got burned because they owned 20 stocks, but 15 of them were in the technology sector. It’s okay to own a few in the same sector but you should equally weight most of the sectors amongst the stocks.

Equal weighting will also make you feel better during the times when one sector is not doing well but others are.

Don’t be afraid that 20 or 25 isn’t “enough.” It is plenty to create a well-rounded portfolio.