How many stocks should you hold in your portfolio?

Key takeaways

There is no fixed number of stocks that suits every investor or portfolio.
Although diversification matters, the portfolio risk isn’t automatically reduced with a higher number of stock holdings.
Choose a manageable number of holdings that you can research, monitor and understand properly.

Do you think holding five stocks at a time is too risky, while owning 30 stocks makes your portfolio unnecessarily complicated? There’s no single number that may be considered ideal for every investor. The right number of stocks your portfolio should hold depends on factors like your available capital, risk tolerance, investment goals, and your ability to research or monitor companies.

Beginners often try to include a certain number of stocks in their portfolio simply for the sake of diversification. Instead, the priority should be building a portfolio where each holding has a clear purpose, and the overall risk profile remains manageable. This guide explains the factors to consider when you decide how many stocks you should hold in your portfolio.

Why does the number of stocks in a portfolio matter

The number of stocks in your portfolio can influence the risk associated with an individual company. Suppose you invest most of your capital in just one or two stocks. A major decline in any of these companies can create a visible dent in your portfolio.

A diversified portfolio can resist risk factors specific to companies. An underlying company may show poor performance, but that’s likely to have a smaller effect on the overall portfolio.

However, you cannot simply reduce the risk component with too many companies in the portfolio. For example, an investor may be holding 15 companies from the same industry. In this case, sector-specific risks deserve attention. Likewise, investing in several companies with similar business models can also create overlapping risk exposure.

Investors should also factor in the impact of diminishing benefits on adding more stocks. If your portfolio already has exposure to a range of businesses and sectors, an additional stock may provide relatively little additional diversification. At the same time, you may have to spend more time researching and monitoring the holding.

The number of stocks in your portfolio matters, but it’s only a part of the portfolio construction. What matters more is the quality of the businesses, their exposure to different sectors, position sizes, and how they fit into the rest of your portfolio.

How many stocks should your portfolio include?

There’s no fixed number of stocks that every investor should own. A practical approach to building a portfolio is to consider the size of capital you have and your risk profile.

A portfolio with fewer holdings allows the investor to analyse each business more deeply. However, as a downside, each stock can have a larger impact on the overall portfolio. This risk can be mitigated by spreading your investments across a larger number of companies. But it takes more time to manage so many investments.

You need to follow financial results and business developments, besides monitoring the overall health of the industry. Instead of thinking about the number of companies to invest in, focus on the role of each of them in your portfolio.

What factors should determine the number of stocks you hold?

Several factors can influence the number of stocks to hold in your portfolio. Evaluate the following:

Your capital

The capital disposable for investment directly determines the size of your portfolio. If an investor has limited capital, and the amount is spread across too many stocks, the individual positions may become very small. Even if the stock performs well, a small portion would have little effect on the overall portfolio.

At the same time, concentrating a small portfolio in a few companies can trigger company-specific risk. For investors, the priority is to consider position sizes along with the number of stocks they want to own.

Your risk tolerance

Are you comfortable with market volatility or fluctuations? Or do you prefer maintaining a more conservative portfolio? Those with a higher risk appetite may maintain a more concentrated holding portfolio. Others might want to spread out their investments across several companies.

Your ability to research and monitor stocks

Every individual stock requires some level of monitoring. From time to time, companies publish their financial results and make strategic decisions. They also face competition and operate in industries that can evolve over time.

When you hold a large number of stocks, you may find it difficult to keep track of all these developments. Investors who struggle to manage their time to track these underlying developments may consider choosing fewer companies with strong fundamentals.

Your investment horizon and financial goals

Your portfolio construction largely depends on your investment goals and time horizon. For instance, if you’re investing for a long-term goal, focus on the quality of the underlying business, along with its growth prospects.

Investors with shorter investment horizons may prioritise different risk and liquidity requirements. The number of stocks in your portfolio, therefore, should be determined in relation to your broader investment plan.

Overall structure of your portfolio

Stocks are only a part of an investment portfolio. You may also hold mutual funds, ETFs, or other assets that provide exposure to multiple segments or industries. Therefore, looking at your stock holdings may not give you a complete picture of your diversification.

Ultimately, it’s your overall portfolio exposure that matters more than the number of individual holdings in a single account.

How does diversification affect the number of stocks?

Diversification involves spreading your investments across different sectors, securities, or asset classes that reduce the dependence on a single investment. However, diversification doesn’t mean buying as many stocks as possible.

Let’s consider two portfolios. The first one has 12 stocks spread across banking, pharmaceuticals, consumer goods, technology, manufacturing, and other sectors. The second contains 25 stocks, but most of them operate in the technology and construction industries. Although the second portfolio has more stocks, it doesn’t have a broader exposure to different sources of risk.

Consider spreading out your assets across companies with different market capitalisations, business models, and sectors. The goal is to make sure that your holdings are not excessively exposed to the same source of risk.

Is it better to hold fewer stocks or more stocks?

Certain advantages and limitations are associated with both these approaches. The table below compares the two approaches based on a few key parameters:

Factor	Fewer stocks	More stocks
Diversification	Lower	Generally higher
Company-specific risk	Higher	Can be lower
Monitoring requirement	Lower	Higher
Impact of one stock	Greater	Usually smaller
Research depth	Easier to maintain	More difficult
Portfolio management	Simpler	More involved

What are the risks of holding too few stocks?

The biggest concern with a highly concentrated portfolio is company-specific risk. Suppose you put a large portion of your capital into one company. Due to an unexpected decline in earnings, a regulatory issue, a management problem, or a loss of market share, the stock price declines significantly.

In these scenarios, the overall impact on your portfolio can be substantial. Holding a few companies can also expose your portfolio to the common factors affecting that sector.

What are the risks of holding too many stocks?

While diversification is necessary, your portfolio may become difficult to manage. Monitoring too many stocks requires time commitments. You need to keep track of financial results, management decisions, industry developments, and company valuations.

The relatively small investment can limit your returns, even if the price of the share you invested in rises. Also, frequent buying and selling of multiple stocks would involve higher transaction costs.

However, there’s no problem with holding a number of stocks if the investor has a clear reason for doing so. Ultimately, your ability to manage your portfolio matters, so decide on the number of holdings accordingly.

How can beginners build a diversified stock portfolio?

Beginners can build a diversified stock portfolio through the following practices:

As a beginner, define your financial goals at the outset and assess how much risk you can reasonably take.
Next, set aside the capital that you’re willing to directly invest in stocks.
Choose businesses that you can comfortably research instead of buying a large number of stocks immediately.
Consider diversifying across different sectors and businesses. Make sure not to concentrate your portfolio on a specific industry or company.
As you get familiar with equity markets, build your portfolio gradually. Don’t rush to invest in a specific number of stocks immediately. You can simply add new stocks to your portfolio as you get to understand their fundamentals better.
If you find it difficult to research and monitor multiple individual stocks, consider investing in mutual funds or ETFs for diversification.

How should you review the number of stocks in your portfolio?

For investors, portfolio reviews from time to time can determine whether the number of holdings still makes sense.

To start with, evaluate why each stock is still part of the portfolio. If you can’t explain the reason for holding a particular company, the position may be worth reassessing.

Investors should also examine how much of their portfolio they have allocated to individual stocks and sectors. Think of a situation where the price of a stock increased significantly after you invested in it. Currently, it may now represent a much larger part of your portfolio than it was originally intended.

Also consider overlapping industries and sectors. Several companies in your portfolio may provide similar exposure, although their businesses are not identical.

Also, review your ability to monitor your holdings. If your current portfolio holds a larger number of companies than what you can comfortably research, consider simplifying your portfolio.

Conclusion

The number of stocks an investor can hold depends on several factors. That’s why it’s important to consider the available capital, financial goals, risk tolerance, diversification, and time commitment to research and monitor individual companies before deciding on the number of holdings.

Instead of targeting a specific number of stocks, focus on the quality of each business and its role in your portfolio. If you’re just getting started, diversify gradually and keep the position sizes under your control. A well-structured portfolio is not necessarily the one with the highest number of stocks. It is one where the investor knows the purpose of each investment, the risks associated, and when to rebalance the holdings.

FAQs

Should you diversify your stock portfolio across different sectors?

Yes. When you hold stocks from different sectors, diversification helps to reduce your dependence on the performance of a single industry. Focus on the companies you understand and can monitor while spreading across sectors.

Should the number of stocks change as your invested capital increases?

Yes, you may consider increasing the number of stocks. As your portfolio grows, you may gain more flexibility to spread your capital across additional companies. However, you must be able to commit adequate time to research all the companies you hold.

Does diversification protect a portfolio from market-wide falls?

No. Diversification can help to reduce the impact of company-specific problems. But it doesn’t eliminate the chances of losses caused by broader declines in the market. During an economic downturn, stocks across different sectors can simultaneously fall in price.

Should you consider your existing mutual fund investments when choosing stocks?

Yes. Mutual funds may already provide exposure to several companies and sectors. So, if you’re holding both mutual funds and individual stocks, review your overall exposure. This prevents your portfolio from unintentionally becoming heavily concentrated in particular companies or industries.

How often should you review the diversification of your stock portfolio?

Periodic portfolio review is necessary to maintain proportionate allocation of funds across different segments and markets. Consider reviewing your holdings twice a year for long-term goals. For short-term goals, you may review your portfolio at a more frequent interval.