One of the most important decisions you make is which stocks to include in your portfolio. Once you have identified the ones you want to buy, the question is how many stocks should you add in your portfolio. There are two opinions on this subject-one says that you should have a diversified portfolio by putting your eggs in a number of baskets, and the other one has a more concentrated approach, the rationale is to put in your money into a couple of stocks which are great investments. Mitigation of risks will reduce the amount of loss from individual stocks. It also means that you will have to remain satisfied with the average results, since diversification will give you average investment results. You can reduce the portfolio risk by holding about ten to fifteen securities and holding between 30 to 100 stocks in the same.When you are planning to load up on the great investments, you should have a fair idea about the economics and what drives it.
Different investors have different strategies they use while investing in stocks. It is believed that a portfolio with stocks from different industries is less riskier than having a portfolio of two stocks concentrated in one industry. There is a constant debate between concentration and diversification of the portfolio. Seth Klarman, a very successful investor mentions that the stock should form no more than 5% to 6% of an individual’s portfolio. Where the confidence with respect to the stock is very high, it could form 10% of the portfolio value. Anything more than that means exposing yourself to higher risk. Besides, if the stock is only 1% of the portfolio, it is too small an investment to make a difference in the overall performance.When risk mitigation is the aim, diversification is the key behind building the portfolio of your choice.
In contrast to the opinion, Warren Buffet says that if an individual is able to understand the business and is able to find five to ten stocks that possess long term competitive advantages, conventional diversification does not make sense here. He mentions that why would an individual like to invest in his 20th favorite stock when he can simply add money to his top choices. I understand, putting all your money in five to ten stocks could be unnerving. Hence, the trick is to find the middle road that works for you. If you own fewer companies, an adverse market position will have an impact on you. Equally, the more you own, the lesser you will know about each company.
To conclude, there is no specific number of stocks you can own in a portfolio, it majorly depends on your risk appetite and your knowledge about the companies you are investing in. If you are a beginner, diversification is the key. Nevertheless, if it is your game and you really know the business, you can load up on the stocks you think are great investments.