How many stocks should you own?
Welcome. In this article, I will put forward my recent learnings about how many stocks should you own. I will discuss all the suggestions given by some great investors like Warren Buffet, Charlie Munger and Ray Dalio. I will also put forward some of the good suggestions from good finance YouTube channels I follow. Let’s jump in.
Before going into this I want you to know the difference between Trading and long term investing. I always want every one of my readers to know this difference. Trading is buying and selling you do in short term and the opposite is investing.
Let us see the Types of Strategies, these billionaires apply to their portfolios.
1. Concentrated Portfolio
Warren Buffet and Charlie Munger are the big investors applying these strategies to their portfolios. Let us see what a concentrated portfolio is.
A concentrated portfolio means you own less than 5 stocks with all your investment money. This is to put all your money on just 5 companies. Let us see what are the risks and rewards associated with it.
Risks: A concentrated portfolio has high risk. Let us say you own 4 stocks with all your money. Your money’s fate is tied to those 4 stocks. Even one guy seen in red will cripple you. Let us see Warren’s portfolio. 41% of his total money is tied to Apple stock. If Apple sees any significant downfall, Warren will take a huge hit.
Rewards: A Concentrated portfolio has high rewards as well. As you are taking an insane amount of risk, you are rewarded with an insane amount of return as well. In the previous example, if Apple stock rises, Warren’s wealth goes bonkers.
2. Diversified Portfolio
Ray Dalio was the billionaire who follows this strategy for his portfolio.
A diversified portfolio is where you invest in a very high amount of stocks like 20 or 30 or sometimes even 50 or 60. Let us see the risks and rewards involved in this.
Risks: A Diversified portfolio has a different type of risk associated with it. Unlike a concentrated one, you are exposed to the risk of losing growth. Yeah, a diversified portfolio of more than 15 stocks is too much safe.
Rewards: A diversified portfolio has a reward of safety. Since not much of your money is tied to a single stock, you will never feel deep cripples in your pocket even if a stock is red.
Now let us analyse which strategy should we follow.
The problem with a Concentrated portfolio is, general retail investors like us, won’t have the privilege of exclusive information like Mr Warren Buffet. Agree or not, He will have very exclusive information about the company on his table when he analyses the stock, which normal investors like you and me don’t.
So, he will and can make much more informed decisions which increase the predictability of stock. With the information at our disposal, can we do the same? If No, then you should not go for a highly concentrated portfolio. You can have such a portfolio when you become experienced.
You should custom design your portfolio based on your risk profile. If you are a high-risk taker, then you can try a concentrated portfolio. It’s your choice. If you feel you cannot afford much risk, try diversifying your portfolio.
“Risk=Reward”, Higher the risk, higher the reward and vice-versa.
Don’t forget this infamous principle.
Missing out on growth
A diversified Portfolio has a problem. In the previous section, I said this is a safe strategy. so, you’ll miss out on growth. Your portfolio does not increase much even if one of the stocks becomes a multi-bagger, as you invested very low in it.
So, What should I choose?
I’ll tell you, what I want to do. You imply it to yourself based on your life.
I am young and just started earning. So, ideally, I have a lot of working life left. I feel I can take risks now. As my age grows, I’ll have a wife and children adding responsibilities to me. Then will be the least good time to take risks. So, I will invest in growth stocks like Small Caps and Midcaps and take some positions in Cryptos as well when I am young. As I age, I’ll shift to more safety.
How many? I am thinking to own 10–12 stocks in my portfolio, which are from 5 sectors and not more than 10% going to one stock. I also want to invest in cryptos and REITS. So, I breakdown my Investment portfolio like this.
- 10% - Cryptos
- 10%- REITS
- 10%- Mutual Funds
- 20%- US Stocks
- 50%- Indian Stocks.
Mutual funds might be a surprise because I haven’t mentioned them even once till now. I want to invest in mutual funds which invest in sectors I missed in stocks.
REITs are Real Estate Investment Trusts, which give you rental income on commercial properties.
Index Mutual funds are also good funds you can consider investing, as they replicate Indices.
Going on the extreme side of both strategies will not help us.
Warren Buffet said, “Only Dumb people diversify their portfolio. Diversifying means you don’t have confidence and information on your stocks”. I partially agree with him.
My theory is simple, I cannot afford extreme risk like Mr Buffet nor lose growth by extreme diversification and playing safe. I believe my strategy lies somewhere between them.
Active and Passive Income
As I said in previous articles, stock markets are best for giving passive income. If you diversify too much, you have to spend more time and effort observing many companies and what you get for that is too little. It means you are doing active work for too little return. That is foolishness.
All of this synopsis is for long term investors. If you are a trader. Having a large number of stocks can be justified.
Having a concentrated portfolio is too much risk and having a diversified portfolio is too safe. Keep this in your mind. My suggestion is to design your strategy in such a way that, your investment journey remains passive and growing.
I hope that this article helped you find the answer to the question that “how many stocks should I have in my portfolio”.
Thanks for the read and Consider following me If you find any value. See you in my next article.
- https://www.youtube.com/watch?v=Q-n5hO9f0HU CA Rachana Ranade
- https://www.youtube.com/watch?v=y-j47ieLzr8 Pranjal Kamra
- https://www.youtube.com/watch?v=DHrvqaEzS2c Asset Yogi
- https://www.youtube.com/watch?v=iptbESNg_mc Akshat Srivastava
- https://www.youtube.com/watch?v=bHPzQIW_pww Warren Buffet about Portfolio.
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- Photo by Worldspectrum from Pexels: https://www.pexels.com/photo/four-assorted-cryptocurrency-coins-843700/