When you think about how many stocks to own, one word probably comes to mind – diversification. And when it comes to diversification “the more the better” – right? If some diversification is good, lots of diversification must be fantastic. Agreed? Not necessarily.
The truth is that if you want to grow your money safely, create income down the line and not worry about your investments, you should consider going the other way. Consider thinning out your portfolio a little bit. When you own too many stocks or funds, chaos ensues. It’s very difficult to follow lots and lots of positions and most people simply don’t. They end up burying their heads in the sand and neglecting their portfolio entirely. That can be expensive.
Diversification isn’t a panacea for risk either. As 2008 proved, most equity investments rise and fall with the overall market. Diversification didn’t save people from the ravages of that nasty experience. And diversification may not do the trick for you in the future.
In short, a portfolio made up of too many positions can lead to underperformance. Rather than focus on winning positions, an overly diversified portfolio often holds underperformers far too long. Like an untended garden, the weeds are allowed to cannibalize the growth of the entire portfolio. If this describes you it’s time to get out your stock market weed whacker and pruning shears.
So how many stocks should you own?
The answer depends on the amount of money you are investing and your investment strategy. According to Investor’s Business Daily, if you have less than $3,000, 2 stocks should do it. If your portfolio is less than $20,000 hold no more than 3 stocks. And the publication encourages investors to have no more than 5 stocks even if you are investing up to $200,000. Portfolios of up to $1,000,000 might have up to ten positions but no more.
Of course the Investment Business Daily s encourages readers to use its unique investment approach and the number of stocks they suggest you hold is largely driven by that strategy. But regardless of which investment plan you use, you can learn a great deal by considering their recommendations.
They argue that you should research your stocks thoroughly, and have a well-thought out buy and sell strategy. These are far more helpful ideas than simply having dispersed holdings
and buying stocks that “feel” like they make sense.
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When you own only a handful of stocks, does that mean you take on more risk? Not necessarily. Even though you have fewer positions you can watch those stocks more carefully and you can still use stop losses to protect your assets when things go south. Stop losses are simply market orders that put in an automatic sell order if a stock drops to a certain level.
Full disclosure – I’m not a huge fan of buying individual stocks. For most people it requires too much work to do well. But I do believe that you can (and should) apply those same concepts when it comes to funds and ETFs. I also believe that if you are buying individual stocks, these ideas further drive home the importance of having a well-articulated investment strategy and that should be determine how many stocks to own.
Do you use some other criteria to decide how many stocks to own? What is it?
Read More At Investor’s Business Daily: http://education.investors.com/investors-corner/647333-ibd-investors-corner-tackles-diversification.htm#ixzz2NIj6XFEp
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