How Many Stocks Should you trade?
If you are a stock investor, especially someone who has just begun exploring the world of stocks, chances are you’ve wrestled with the same doubt. What Is the Ideal Number of Stocks to Have in a Portfolio? There is no single correct answer to this question.
Let’s discuss the approach you can take to arrive at a satisfactory conclusion.
For any investor, it is safe to say that no single stock should be more than 5-6% of the entire portfolio, as suggested by Seth Klarman, a successful investor and author.
The correct number of stocks to hold in your portfolio depends on several factors, such as your country of residence and investment, your investment time horizon, the market conditions, and your propensity for reading market news and keeping up-to-date on your holdings.
The more equities you hold in your portfolio, the lower your unsystematic risk exposure. A portfolio of 10 stocks, particularly those across various sectors or industries, is much less risky than a portfolio of only two stocks.
Of course, the transaction costs of holding more stocks can add up, so it is generally optimal to hold the minimum number of stocks necessary to effectively remove their unsystematic risk exposure. What is this number? There is no consensus answer, but there is a reasonable range which is 15 to 25, depending on the investment strategy.
The investment strategy also determines how many stocks you should own; whether you want a concentrated portfolio of high dividend-yielding blue-chip stocks or if you are investing in high growth small cap stock or diversify it to a larger number of stocks to lower the overall risk of investment. The final decision is yours.