I’ve always felt that investing without a plan or a clearly defined goal is a sure way to lose your money in the stock market so the question of how many stocks you should have in your investment portfolio is something that should be considered along the same lines as your goal. The easiest answer to this question is that it depends but there are so many differing opinions that I’m convinced that there is a better reply.
Warren Buffet who is arguably the smartest investor in the world said in a Q&A that he only owns one company in his personal portfolio which is his own company Berkshire Hathaway – which is a holdings company that holds many more companies. So although he technically owns only one for himself, he’s still the CEO of his own company who own approximately 60 other companies. And these too, are the one’s that they declare. But the general consensus is the figure of 20-30 stocks.
In this post, we’ll go through how many stocks you should own in your investment portfolio and also look into why Warren Buffet famously said that diversification is a protection against ignorance. Read on to find out more.
How many stocks does Warren Buffet own?
Diversification is a protection against ignorance. It doesn’t make sense if you know what you’re doing.Warren Buffet
Warren Buffet in his personal investment portfolio only has one company which is Berkshire Hathaway which is his own company. Berkshire Hathaway is a holdings company that holds and manages stocks across a wide range of industries, the majority of which is made up of some of the most stable companies such as Apple (AAPL) and Coca-Cola (KO). So why doesn’t Mr Buffet diversify his own personal portfolio? His partner and long-standing soundboard, Charlie Minger – also a great investor – only has three companies in his own portfolio.
The answer is in Warren Buffet’s quote above – diversification is a protection against ignorance. It doesn’t make sense if you know what you’re doing. I’m sure most people will agree that Warren Buffet knows what he’s doing and so for him, it makes more sense to concentrate more of his wealth into a single company or a small selection of companies whom he knows will profit him more. The same is the case for Charlie Munger.
This can be demonstrated better with an image that I created:
If you don’t know what you’re doing and you only invest in a small number of companies, unless you’re lucky, you’ll most probably fail. If you know what you’re doing and you invest in a small number of companies, you’ll most likely succeed.
Therefore for the majority of investors – including me, diversifying your portfolio is the way to go because it protects me from failing and ending up losing my money.
How many stocks should I have in my portfolio?
As a beginner, it’s normal to not know what you’re doing so investing in more companies than just one or a few is a good strategy to have because it will help to diversify your portfolio and protect you from making huge losses if any losses were to occur. The stock market is unpredictable in the short term so you lose a portion of your investment. If you were to diversify your losses will be minimised.
This doesn’t mean that you still can’t make profits. I think diversification is a great way to make profits as if you make losses in one company then there will be other companies that have made profits which will balance out your portfolio and keep you in the green.
The number of stocks you should have in your portfolio is probably 20-30 and this is a number that is generally accepted by most investors. Having up to 30 companies will ensure that your portfolio is fairly diversified and will prevent one or more companies from taking up a percentage that is too large. Over-reliance on just one or a few companies means that your portfolio isn’t really diversified.
Having an investment strategy or plan will help you make this decision better since you might need less or you might need more. At the moment, I have approximately 14 companies in my portfolio but I do plan on adding more however for the present time I am focusing on accumulating more shares in the companies I have to build more wealth and earn higher returns. I’ve written about my investment strategy linked here which you can refer to. It talks about my goals and the investing rules I’ve set myself to achieve those goals.
Why diversification is beneficial
As Warren Buffet said, diversification protects anyone who doesn’t know what they’re doing from losing money in the stock market. This applies to all investors, even seasoned ones. That’s because if you hold a portfolio of a few companies, you’re more likely to lose money as you haven’t spread your risk. This is just one of the benefits of diversification:
- Minimises risk
Spreading your risk across a lot of companies and a lot of sectors reduces the risk of losing money. The stock market cycle leads investors to buy and sell shares all the time which causes companies to rise and fall in value continuously.
When a company in a certain sector falls in price, your entire portfolio won’t be affected badly as the other companies in other sector’s may be fine. Therefore spreading your risk will minimize the amount of money you will have lost even if it’s only for a short time. This may be useful for investors who trade for a quick profit but cycles such as these don’t matter to investors who invest for long-term returns via dividends.
Recommended Reading: What Is Dividend Growth Investing?
- Protects against unforeseen market conditions
Market conditions change all the time and nobody knows when this happens for example there may be a correction or the stock market might crash. You might want to read my post on what to do if and when the market is crashing as it outlines some key strategies which I have found very useful.
However, when such a thing occurs, your investment portfolio will be protected if it is diverse especially if you have invested in multiple markets. Covid-19 caused the world to shut down and stock price to collapse but it didn’t happen all in one night. Having the advantage of living in different time zones can give you the benefit of making decisions sooner rather than later.
For me, I wasn’t bothered when the prices fell. In fact, I loved it as I bought more shares at lower than usual prices which now earn me more dividends in income than before.
- Helps swap your investments much more easily
When you have a portfolio with many different companies invested in and then find over time one or two haven’t been performing as you expected then it’s really easy to sell the position and then use those funds to replace it with something else that might be much better. I’m not a fan of selling but I’ve spoken about situations in which you should sell your stocks.
Having a diverse portfolio allows you to sell positions without losing your entire portfolio or at least a large chunk of it.
Complimentary Reading: 5 Ways to Diversify Your Investment Portfolio
Beware of Over-diversification
I’ve said that diversification is good but there is a time when it can be bad. And that’s when you over-diversify your portfolio to such an extent that you don’t know what you own. You might think as a dividend investor, the more you have the better and it shouldn’t matter what you have as long as it pays a dividend but that isn’t true.
If you over-diversify, you risk the possibility of reducing the number of returns you can make as your holdings will all be very diluted and there won’t be enough cash distributed among them for you to earn sufficiently in either dividend or in growth.
You can study a lot of topics and become an ocean whose depth is only 2cm or you can specialise.An old lecturer of mine
It’s a bit like a saying I was once told by one of my lecturers in which he said you can study a lot of topics and become an ocean whose depth is only 2cm or you can specialise in a few topics and become an ocean with a huge surface and depth. The former is of no benefit to either you or anyone else so there’s just no point.
How many stocks should you have in your portfolio? If you know what you’re doing then a much as you need. That could be one or it could be three. but if you’re like me and the majority of investors, we need to protect ourself from our own ignorance and have a wide range of companies. The general number stands at 20-30 but some even feel up to 60 is good (which is kind of like a mini index fund). But beware of minimising your returns due to over-diversification.
I’ll leave you with the following two key points:
- Warren Buffet knows what he’s doing so it makes sense that he doesn’t need to be as diverse in his own personal portfolio. But his company, Berkshire Hathaway is an extension of his portfolio which hold many companies.
- Diversification protects us from huge losses and has many benefits. I’d recommend diversifying.
Hopefully you liked what I had to share. If so, pay it forward by sharing it with others.