How Many Stocks Should A Diversified Portfolio Have?

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  • 30 Jan 2023
How Many Stocks Should A Diversified Portfolio Have? | Kotak securities

Diversification is a must to prevent risks and losses. Isolating your investment in one stock will result in losses if the price of the company’s stock goes down, or worse, the company goes bankrupt. There are different types of risks you should be wary of. An example is systematic or non-systemic risk that comes from the rising unemployment rate or the economic instability in the country. You also have to be cautious of the company-specific risk that comes from poor management decisions, corporate incompetence, and other human errors that cannot be foreseen. By investing in stocks from different industries, you can reduce the risk concentration for your investments. Various factors determine the number of stocks you should own in your portfolio. These include your nation of residence, investment timeframe, market circumstances, and proclivity to study market information and stay updated on your assets.

Systematic risk is the associated risk that factors the entire market, whereas unsystematic risk is specific to a particular industry or company.

Investors cannot diversify systematic risks, including the threat of an economic downturn dragging the share market down. It is inevitable and cannot be predicted as it depends on significant macroeconomic factors.

However, knowledge and information coupled with an educated investigation in the field of the current portfolio model have demonstrated that a well-diversified investment portfolio can help decrease unsystematic risks to almost zero. Thus, it keeps the expected rate of return similar for both portfolios. The more stocks you have in your investment portfolio, the less you are exposed to unsystematic risks, as the exposure to any specific company or industry is lower than to the overall portfolio. The transaction expenses of owning additional stocks can quickly mount up. Thus, it is usually best to retain the fewest stocks needed to efficiently reduce exposure to unsystematic risks.

What exactly is the number? There is no universally accepted answer, although there is a respectable range. In general, most investors keep at least 20 to 30 equities in their investment portfolios. Suppose the thought of researching, selecting, and maintaining 20 or more equities intimidates you. In that case, you may want to consider utilising ETFs or index funds to provide fast and easy portfolio diversification across distinct sectors as well as market caps. These asset classes effectively allow you to buy an equity basket with a single transaction.

The response to this question is determined by your preferred technique of asset selection.

  • You could invest 100% of your investment portfolio in equities if you adopt an aggressive strategy.
  • Being a little aggressive, you can transfer 80% of your investment assets to equities and the rest 20% to investment bonds.
  • If you want to achieve moderate income, you can allocate 60% of your investment portfolio to equities and the rest 40% to bonds.
  • Lastly, if you wish to maintain your capital instead of earning larger returns, devote no more than half of your portfolio to equities.
  • To be more shielded against probable market downswings, a solid general rule is to reduce your proportion of stocks and raise the number of high-quality investment bonds as you become older.

Conclusion

There are many strategies you can use when it comes to putting together a portfolio of stocks. Some will say you should have more than 50 shares, while others will tell you to keep only 10–15 stocks in your portfolio. The truth is that it does not matter how many stocks you have in your portfolio as long as you base your decision on a well-thought diversification strategy. This strategy can vary from investor to investor based on individual investment goals, risk tolerance, and other such factors.

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