How Many Stocks Should you own for a Diversified Portfolio cover

How Many Stocks Should You Own For A Diversified Portfolio?

Whenever a newbie investor starts building their stock portfolio, the most important question that comes to their mind is how many stocks to buy? How many stocks should you own for a diversified portfolio? In other words, how many stocks are too few, and how many stocks become too many in a portfolio?

In general, there is no correct answer to this question and the response may vary according to your investment goals. However, there are few thumb rules for defining the number of stocks in your portfolio.

In this article, we’ll discuss how many stocks should you own for a diversified portfolio. However, first, we should understand the meaning of a diversified portfolio.

What is a Diversified Portfolio?

A diversified portfolio is investing in different stocks from dissimilar industries/sectors in order to reduce overall investment risk and to avoid damage to the portfolio by the poor performance of a single stock.

For getting good returns from your investments, it’s important that your stock portfolio is well diversified. Both under diversification and over-diversification is adverse for an investment.

  • Under-Diversified portfolio has more risk as the poor performance of a single stock can have an adverse effect on the entire portfolio.
  • On the other hand, an Over-Diversified portfolio gives low returns and even good performance of a single stock will lead to a minimum positive impact on the overall portfolio.

As a thumb rule, as the number of stocks in the portfolio increases, the portfolio becomes more diversified, and risk decreases (but the net profit on the portfolio may be lower).

In a similar way, as the number of stocks in the portfolio decreases, the portfolio becomes under-diversified, and risk increases (but profit on the portfolio may be higher).

How Many Stocks Should You Own For A Diversified Portfolio?

In general, here’s a thumb rule on how many stocks should you own for a diversified portfolio:

— Minimum 3 stocks from Different Industries

There should be at least three stocks from dissimilar sectors/industries in your portfolio.

— Maximum number of stocks should be 20

The maximum number of stocks in any retail investor’s portfolio should be 20. If the number of stocks becomes greater than 20, then it becomes counterproductive for the portfolio. Although the risk decreases but the profit margin will also decrease. The impact of a single stock in the portfolio will be minimal.

Note: Here the number of stocks in a diversified portfolio is suggested for an investment over Rs 50,000. If you’re investing a lesser amount, then your stock portfolio can be different. Read more here: How To Invest Rs 10,000 In India for High Returns?

Diversification is a good method to safeguard your portfolio during a market correction or a bear market. All the stocks in your portfolio will not perform poorly at once and even the poor performance of few stocks will be canceled out with your good performing stocks.

However, the diversified portfolio does not act as a shield for your portfolio during a recession or market crash. During the 2008 market crash, when Sensex fell over 60%, then even the well-diversified portfolios weren’t able to safeguard the investor’s portfolio.

Other points to Note for Diversified Portfolio

Here are a few other points that you should also know while building a well-diversified stock portfolio:

— Rebalance your Portfolio Regularly: Sometimes, a few of your stocks might be performing extremely well and can become the major contributors to your portfolio. In such cases, rebalance your portfolio so that it can remain diversified.

— Hold the winners and Cut the losers: Do not hold the underperforming stock too long just to keep your portfolio diversified. Sell the losing stocks and re-organize your portfolio.

ALSO READ

Stock Portfolio for Beginners: How to Create Your Stock Portfolio?

Closing Thoughts

Ideally, a well-diversified portfolio should have 8-12 good stocks from different sectors/industries. The minimum number of stocks should be three and a maximum of 20 for the stock portfolio of a retail investor.

That’s all. I hope this post on How many stocks should you own for a diversified portfolio was useful to the readers. If you have any doubts regarding your portfolio, please comment below. Invest smart, invest long.

Stock Portfolio for Beginners - How to Create Your Stock Portfolio

Stock Portfolio for Beginners: How to Create Your Stock Portfolio?

Essential Tips on How to Create Your Stock Portfolio: An intelligent investor should know the importance of building a well-diversified portfolio. Whether you’re investing in stocks, bonds, or any other investment, you should always build your portfolio smartly. Although most investors have a different strategy for creating their stock portfolio, there are a few main points that should be taken care of.

In this post, we’ll discuss what is how to create your stock portfolio and give you a few of the rudimentary tips while building the winning stock portfolio.

What is a Diversified Stock Portfolio?

A diversified portfolio is investing in different stocks from dissimilar industries/sectors in order to increase profits, reduce overall investment risk, and avoid damage to the portfolio by the poor performance of a single stock.

For getting good returns from your investments, it’s important that your stock portfolio is well diversified. Both under diversification and over-diversification is adverse for an investment. A smartly diversified stock portfolio maximizes the profit and minimizes the risk. Hence, the first step of creating an intelligent portfolio is right ‘Diversification’.

What diversification means, in general, is to buy stocks from different sectors (Ex: Banking, Auto, FMCG, Energy, IT, Metals, etc) rather than buying a single or two stocks of lump-sum. It follows the old rule of intelligent investing: ‘Don’t put all your eggs in the same basket.’

diversified portfolio stocks

While many investors argue that it makes more sense to invest a huge sum of money in a sure-shot stock, however, we differ from this argument. There are various reasons we can give you to support our argument.

First, you can never exactly know which stock is the next Microsoft or the big shot. Stocks like Microsoft are only a few among more than 5,000 stocks in the stock market. If by any chance you made a mistake or if by bad circumstances, the company is not able to perform as expected, and then your entire investment will be in vain & you will face a tremendous loss.

Second, for investing in such a company, you need to be 1,000% sure. You need to do a lot of intense research about the company, which might be generally not possible for retail investors. However, if you build a diversified portfolio you can take slight risks if you are confident about your other holding stocks.

For example, if you have 10 good stocks and you’re certain that most of them are fundamentally strong and are performing well in the market, you can take a little risk in the 11th stock. One riskier stock will not affect your entire portfolio. However, in the case of a single stock portfolio, it is either wins or gone.

Therefore, in this article on how to create your stock portfolio, we suggest retail investors to build a well-diversified portfolio. Do not buy one lakh shares of just one company in your portfolio.

ALSO READ: How Many Stocks Should you own for a Diversified Portfolio?

Advantages of a Diversified Stock Portfolio

Here are  a few of the best advantages of building a well-diversified stock portfolio:

1. Diversification helps you in giving liberty to choose a variety of stocks.

You do not need to do extraordinary in all the stocks you choose. If most of the stocks in your portfolio are performing well, then your portfolio will overall be in profit. Like the legendary investor Warren Buffett said ‘You only have to do a very few things right in your life so long as you don’t do too many things wrong.’

2. It will reduce the effect of the underperforming stocks: Sometimes economy or some sectors underperform and because of which the stock may underperform. Say, if the entire bank sector is not performing well, then your banking stock will be also probably at loss. However, it is very less likely that all other sectors (like IT, Auto, Pharma, FMCG etc), will also underperform at the same time. During such times, diversification can help you to remain in profit withholding the stocks of other sectors.

3. You can keep holding your favorite stocks for long: If because of some unpredictable reason, one of your stocks is not performing well, but you are confident that it will perform well in the future, you can still keep the stock on the stake of your other good-performing stocks. You just need to balance the portfolio and be overall it will be in profit. On the other hand, in the case of an undiversified stock portfolio, if your one stock is not performing, you will be in overall loss and which might lead you to sell that potentially strong stock.

Hence, from the above arguments that we just put forward, you must follow the diversified portfolio approach in your stock investment in order to maximize profits and minimize your losses.

How to Create Your Stock Portfolio?

Now, we will give you an example of how to create your stock portfolio using a diversified portfolio strategy so that you can get a clear idea of what we discussed above. Let’s suppose you’ve to build a stock portfolio of approx Rs 1 lakh. You can build a diversified portfolio with allocations something like this:

StockINDUSTRYPrice on 09-11-2017Number of SharesInvestment ValueAllocation
HDFC BANKBANK₹ 913.9213₹ 11,880.9611.78%
ASIAN PAINTSPAINTS₹ 1,195.6017₹ 20,325.2020.16%
HINDUSTAN UNILEVERFMCG₹ 1,252.9012₹ 15,034.8014.91%
RELIANCEREFINERIES₹ 892.0417₹ 15,164.6815.04%
CADILAC HEALTHPHARMA₹ 478.8017₹ 8,139.608.07%
TITANJEWELLERY₹ 777.9010₹ 7,779.007.72%
TATA CONSULTANCY SERVICESIT₹ 1,368.209₹ 12,313.8012.21%
BHARTI AIRTELTELECOMMUNICATION₹ 462.9922₹ 10,185.7810.10%
Total₹ 1,00,823.82100%

diviersified stock portfolio example trade brains

Quick Note: The above example is only for educational purposes and should not be considered as a stock recommendation or suggestion. Please pick stocks carefully before investing.

Closing Thoughts

In this article, we discussed how to create your stock portfolio. Here, we understood the importance of building a well-diversified stock portfolio that can maximize profits and minimize risks.

Although there are many other important points in our discussion about how to create your stock portfolio, however, we’ll discuss them in our subsequent posts. Till then, have a great time and happy investing.

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