Is there an ideal number of stocks to own?
Not exactly, according to experts—but you should have at least 20 and possibly a minimum of 60, according to a range of research and investing experts and research.
It’s a big undertaking to consider your investing timeline, risk tolerance, and how much you want to allocate to each stock. “You need to be technically savvy and understand companies and how to analyze them,” says Corbin Blackwell, certified financial planner and senior financial planner at Betterment.
However, there are low-cost and proven shortcuts to owning dozens of stocks. Let’s talk about stock diversification.
Is There an Ideal Number of Stocks to Own in Your Portfolio?
The biggest strength in any portfolio is diversification. When you have diversity, you can more easily mitigate risk and weather market downturns —as well as earn better returns over the long term.
For these reasons, you’ll need several stocks in different sectors that can balance each other out. “A small number of companies is not going to provide enough broad diversification,” says Blackwell, who speculates the average investor would need a double-digit number of stocks for appropriate diversification.
“Anything under 20 is highly concentrated, and at that point, you’re exposing yourself to single-security risk,” says Liz Young, head of investment strategy at SoFi. That means your investments could fluctuate by big margins every time one industry or company has a price change.
Some experts say that somewhere between 20 and 30 stocks is the sweet spot for manageability and diversification for most portfolios of individual stocks. But if you look beyond that, other research has pegged the magic number at 60 stocks.
A study completed from 1986 to 1999 by Ronald J. Suez and Mitchell Price of Roxbury Capital Management investment firm in California found that when portfolios have 60 stocks (or more), investors will achieve 89% diversification, meaning your portfolio is protected against volatility. Anything less than that can be detrimental to your portfolio, the research found.
Why Is It Important to Have Diversity in Your Stocks?
“You don’t want to have concentrated risk in a single company or industry,” says Young. “There are drivers that can happen in the economy and in the market – and they do not affect all sectors equally.”
Your stocks aren’t supposed to all move up or down at the same time, Young says. A diversified portfolio will have subsets in the red and others in the green, because different factors drive the market each day. Having diversity in your stock choices gives you exposure to more industries and balance during downturns. And it’s easier to predict future risk for more accurate projections.
Investors should have no less than 60 stocks in their investments in order to have a well-diversified portfolio. If you don’t have time to research but want to start investing, consider a low-cost, broad-market index fund instead.
Spreading out your investments reduces your portfolio’s risk while maintaining the same expected return, says Blackwell.
When you have a portfolio heavily concentrated on a handful of companies or just a few industries, if one company or industry goes down, then your whole portfolio goes down. Diversification helps to make sure that doesn’t happen, or at least provide a cushion if one area is free falling down.
One of the best ways to mitigate risk and ensure a diverse portfolio is to invest in low-cost, broad-market index funds, such as the S&P 500 fund, a total market fund, or even funds devoted to a cross-section of the market like a technology or small cap fund.
These funds often include holdings in hundreds of companies across industries and seek to match the performance within the overall market. If you decide to invest in an index fund, you can make it the centerpiece of your portfolio and supplement with single stocks, which is the strategy that Blackwell and Young recommend.
How Often Should You Swap Stocks Out?
It depends on your goals. If you want your portfolio to last into retirement and you have a long investment horizon, somewhere between quarterly and once or twice a year is ideal. If you only want to hold stocks for a short while, you might rebalance, meaning buy and sell certain stocks to match your goals, more often, such as every year until you’ve reached your target.
It’s generally a good practice to hold all your stocks for at least a year to avoid paying short-term capital gains taxes. For tax purposes, anything you hold for less than a year is considered short-term. So unless it’s worth it to pay those taxes, you should expect to hold on to your stocks for at least a year, and potentially much longer, depending on what your future plans are for your money.
How to Start Investing Today
If you don’t have the time or energy to put research into individual stocks, index funds are a great way to achieve instant diversification. They track the overall market (or a portion of it) and allow you to invest in hundreds of companies with one transaction.Many people use them as a primary investment vehicle not only because of their efficiency, but because you don’t need any prior knowledge to start investing. They may also have extremely low fees.
Wherever you land, the best way to start is to open an investment account with a brokerage. Then you can purchase index funds or individual stocks as you build your investment plans and portfolio. Most brokerages also provide tools for ongoing research and an overall snapshot of each available company stock or index fund.
If you need more assistance in your investment portfolio, a robo-advisor can ask you a few questions about your risk tolerance and investment timeline to determine the best investment strategy for you. Most often, they’ll assemble a mix of index funds for you, and are reliable for beginner investors to get started.