How many stocks should you buy for the best returns?
With dozens of stock picks coming at you every day, how do you know how many stocks to buy? How many stocks should you own in a portfolio for the highest possible return?
In this video, we’ll look at research to reveal that optimal number of stocks to own and how to make getting those returns as easy as possible.
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Basic Investing Questions: How Many Stocks to Buy
Nation, one of the most frequent questions I get here on the channel and more important than you might think is how many stocks should I own. What is that best tradeoff between spreading your money across multiple stocks and focusing on a few for higher returns?
It’s a question that even a lot of experienced investors get wrong. You’re sitting there maybe spending an hour or two a week watching videos or TV on investment ideas, even investing in just a couple of the new ideas every week, you can end up with a portfolio of hundreds of stocks.
The problem here is that while too few stocks leave you dangerously exposed to the ups-and-downs of those companies. Having too many stocks completely saps your chance to get higher returns. You’re just too diversified across so many stocks that your portfolio barely budges when one takes off.
How Many is Too Many Stocks?
For example, if you own 50 stocks with an equal 2% of your portfolio in each. Even if one of those stocks doubles in value, you’ll still only see your total portfolio return rise by 2% on that stock.
It’s a fine line between being protected from scandal or the risk in any single stock to having too many stocks and not being able to get anything but a market return.
So in this video, we’ll look at research on that optimal number of shares to own. Then I’ll reveal a strategy I use to get the best of both worlds. I’ll show you how to get the diversification you need to protect your portfolio but also higher returns to beat the market. I’ll show you how many stocks to buy plus how much to invest in each stock.
How Many Stocks Does Average Investor Own?
How many stocks the average investor owns has changed over time and I think this really speaks to a problem in the market. Research by Blume and Crockett in the early 70s found that a third of investors held just one stock and half had two or fewer stocks in their portfolio.
More recent research from the Federal Reserve shows that the average investor now holds upwards of 30 stocks in their portfolio.
So you’ve got that shift from investors maybe holding one or two stocks, usually their employer or maybe a popular company, to investors now holding 30 or 40 companies in their portfolio. And it’s because investing has become an entertainment industry!
Of course, holding just one or two stocks isn’t good for investors because it means being wiped out when one of those companies falls on hard times. The problem with the 180-degree shift though is that holding 30 or 40 individual stocks means you’re probably not really doing the research in any of them.
You’re spending maybe an hour max to look at a company, digging into its financials and you’re probably not able to keep up-to-date on the news and earnings reports for every stock in your portfolio. And if you are trying to do all of this, really tracking an investment like you should, you’re spending ten-plus hours a week following your stocks.
It’s that transformation of investing into an entertainment industry where the pundits on TV and online are more interested in vomiting up as many stock picks a day, confusing you with as much conflicting analysis as possible and just keeping you chained to the market.
Investing is no longer about making you money. It’s about keeping you entertained and keeping you trading so brokers can collect commissions and fees.
How Many Stocks Should You Have?
So enough of the rant and don’t get me wrong, I love that investing is accessible to everyone. The growth of the investing public over the last few decades has helped to narrow that savings gap but it’s also come at a cost of almost too much information.
One of the ways I get around this information overload in stock picks is I’ll add a stock to my paper portfolio on the Webull app first before investing real money. I can use the Webull simulator to follow a stock or test out a strategy and then put real money behind the best picks every few months.
Now when we look at the actual research on how many stocks to own, and most of this is built around the idea of the minimum number of stocks you need to be diversified. So the least number of stocks you should own so that your wealth doesn’t jump up or down too much from any one company.
The most famous of these is by Evans and Archer published in The Journal of Finance in 1968 and they found that you can get your diversification and spread that risk around in as few as 10 stocks.
Understand an important part of this is the idea that these are randomly picked stocks. It’s important because if you’re consciously picking stocks based on factors like price-to-earnings ratio or maybe dividend yield or whatever, you’re more likely to end up with companies that have common characteristics. Maybe you end up with 10 stocks from just one or two sectors of the economy or maybe you end up with a narrow group of tech stocks if you’re looking for growth.
In that case, you’d need more than 10 stocks because you need to make sure you have investments in different themes or sectors to balance out.
Another popular study was done by Meir Statman in the Journal of Financial and Quantitative Analysis in ’87 founding you’d need at least 30 stocks for that minimum level of diversification.
There’s other research but the consensus seems to be between owning 10 and 30 stocks is the right level. This is where Benjamin Graham recommends in what’s pretty much the investing bible, The Intelligent Investor. In fact, Warren Buffett holds a little more than this, 43 stocks in his Berkshire Hathaway portfolio though they are grouped around just seven of the 11 sectors.
My Favorite Investing Strategy for Stress-Free Investing
The problem is, if you’re looking at holding 20 or 30 or more stocks, we’re back to that problem of time.
Unless you’re a professional investor, you don’t want to spend more than a few hours a week following stocks. Believe me folks, it’s just not worth it. You want to be enjoying your time with your family or whatever you like to do, not slumped over a cash flow statement trying to pick stocks.
With 20 or 30 stocks, considering you need to read through earnings reports and financials every three months for each, it just isn’t realistic for the average investor.
That’s why I use the core-satellite approach where I invest in eight to ten individual stocks and three to five funds. With about 70% of my portfolio in those funds, that’s all the diversification I need. I get exposure to hundreds of stocks, bonds and real estate companies so I’m covered on every part of the economy.
Now with the remaining 30% that I have in those eight or ten stocks, I get the opportunity for higher returns. I’ve got three to five percent of my money in each so I’m not overly exposed to problems at one company but I still have a chance to pick some strong stocks that are going to do well.
That last part is important so I want to repeat a point. You should never have more than maybe five percent of your money in any one stock.
The problem here is that investors get excited about a stock, they put a bunch of money but maybe the shares fall so the investor buys more shares in that dollar-cost averaging. They keep adding more shares and pretty soon, you’ve got one stock that is twenty- or thirty-percent of your portfolio.
What happens if the company bankrupts? Even if it doesn’t, where is your portfolio going if that stock is dead money for years?
You have got to keep a limit on the amount you have in any one stock. I like to keep mine at no higher than 5% of my portfolio. You might decide a little lower or a little higher but I’d keep it around that area.
Another way to think about this question of how to invest or how many stocks to own is investing in one specific sector for your individual stocks while getting your market diversification through ETFs.
How Wall Street Really Works
A lot of investors are surprised to hear that this is how Wall Street really works. Professional analysts cover maybe one sector or industry or even only a few stocks. It’s where they have deep professional experience so you get a lot of pharmaceutical researchers or doctors that become analysts on healthcare stocks. You get engineers becoming analysts on tech stocks.
Most analysts don’t try to pick stocks from every sector so why are you trying to? A healthcare analyst doesn’t try to pick tech stocks because they don’t have that deep experience that is going to help them pick better companies.
This is what Peter Lynch meant when he said, invest in what you know. It’s not about investing in the products you know or like. It’s about investing in the sectors or companies in which you have that deep professional experience.
So instead, why not get your market diversification through a few funds, get that exposure to the stock market, bonds and real estate, then put your experience and knowledge to good use by picking the very best companies in one industry?
So if you work in transportation, this means you learn everything you can about what makes a good transportation company and you find those with a competitive advantage. You already have some professional experience in that sector or a specific industry, put it to use and invest in maybe three or five of the best companies in that group.
You’ve got that market exposure and diversification through the fund investments. Maybe three to five ETFs that hold hundreds of stocks, bonds and real estate companies. On top of this, you’ve got that upside return potential from being able to spot the best of the best in that one sector or industry.
Not only is this strategy going to help you pick better stocks, it’s also going to make you an asset to your own job. You’re learning what makes companies successful in that industry, you’re setting yourself up for a management position and to make more money.
I know it's a lot to throw at you just to answer the question, “How many stocks should I buy?” The answer is definitely more than five but likely less than 20 or 30 companies. Use the core satellite strategy and ETFs to get broad diversification then pick a small handful of companies for extra returns.