Optimizing Your Stock Portfolio: How Many Stocks Should You Own?

When it comes to building a stock portfolio, the number of individual stocks you should own can greatly depend on your financial goals and investment strategy. This article will help you understand the key factors involved and offer insights on how to determine the ideal number of stocks for your portfolio.

Key Factors Influencing the Number of Stocks

There is no one-size-fits-all answer to how many individual stocks you should own. It depends on various factors including financial goals, investment strategy, and personal risk tolerance. Here are some critical aspects to consider:

The Role of Individual Stocks vs. ETFs

Firstly, you need to decide whether you want to own individual stocks or an ETF. Owning a few individual stocks can offer higher potential returns, but also higher risks. In contrast, an ETF (Exchange-Traded Fund) is a basket of stocks that tracks an index, providing diversification.

Too Many Stocks: The Path to an ETF

Adding too many individual stocks to your portfolio can make it resemble an ETF that follows the market. The Dow 30, for example, consists of 30 individual stocks, which collectively represent the movement of the broader market. When you own a large number of stocks, your portfolio becomes highly diversified, minimizing individual stock risk but sacrificing the potential for higher returns.

Not Enough Stocks: Increased Volatility and Risk

On the other hand, not owning enough individual stocks in your portfolio can increase its volatility and risk. Take Facebook as an example. Since its initial public offering (IPO), Facebook's stock price has experienced significant volatility and wild swings. While long-term success is anticipated, short-term fluctuations can be extreme. This volatility can lead to financial distress for investors who rely heavily on it.

Your Investment Strategy Matters

Depending on your investment goals and strategy, the number of stocks in your portfolio should vary. If you are an ETF investor, the number of stocks in your portfolio is less relevant, as your focus is on the broader market's performance. Conversely, if you are a growth investor, you might want to own fewer stocks to increase your chances of picking successful ones. For a dividend investor, owning more stocks can increase the likelihood of receiving consistent dividend payments.

No Limit to How Many Stocks You Can Own

While there is no strict rule limiting the number of stocks you can own, the more stocks you add, the more balanced and diversified your portfolio becomes. Some investors opt for extensive diversification to minimize risk. It is entirely feasible to own a large number of stocks, but it's crucial to ensure they are well-researched and diversified.

Mind Your Minimum Investment

Before investing in any stock, it's wise to set a minimum investment amount that reflects your commitment. For me, considering at least $1000 per stock makes a significant impact. This strategy forces you to think twice before investing, as you would essentially be committing to the success of a new business you've acquired ownership in. This approach ensures you are prepared for the long-term, becoming a stakeholder and a key player in the company's success.

Account-Specific Goals and Risk Tolerance

Your investment accounts may have different goals and risk tolerances. Here are some examples from my portfolio:

Roth IRA: This account is tax-free, so it's ideal for investing in income-producing assets that are less risky. 401k: Designed for long-term savings, it prioritizes stability and growth slightly more than the Roth IRA. HSA: Aimed at healthcare and safety, it focuses on low-risk investments to protect your health savings. Stock Brokerage Account: Here, you can take on a bit more risk to potentially secure higher returns.

Since I am younger and able to take on more risk, I aim to own a minimum of 4 stocks and no more than 20. However, every investor's situation is different. You need to assess your age, family responsibilities, and how closely you align with your spouse's investment strategy before determining the appropriate number of stocks.

No Magic Number

Ultimately, there is no magic number that guarantees success. The stories of the world's wealthiest individuals illustrate that some of them became billionaires by owning a single business or stock that made them wealthy. For example, Mark Zuckerberg's ownership of Facebook (now Meta) has made him one of the world's richest individuals. If you truly believe in a company's future success and it has a solid track record, it might be wise to hold onto a stock for the long term.

When selecting stocks, focus on researching and understanding the business, its financial health, and market positioning. Building a well-researched and diversified portfolio tailored to your investment goals can lead to sustainable wealth growth.