How many stocks should a portfolio hold?
Hold between 5 to 30 stocks with an exception as the answer to how many stocks to hold.
5 Factors to consider
This reader’s question, “how many stocks to hold”, brought to mind the 1974 Morris Albert song, “Feelings”, about a relationship gone bad with a girl…or was it with a stock! No, definitely a girl! Besides dating myself the point is your feelings matter when it comes to setting your portfolio count and position size.
As a generalization for this discussion and all others that we have; guidance and investing rules of thumb are there to guide. They give us a framework. They are not absolutes. There are times when breaking rules produces exceptional gains. Don’t hesitate to go over the line when opportunity says, “take me, I am yours!”
Just make sure brains and not hormones or emotions are in charge of your investment decisions!
New White Top View Series
This post on how many stocks to hold is Part 1 of the 6 part White Top View series, Portfolio Counts and Sizes. The series discusses various considerations that investors make when deciding the number of holdings and the size of each investment position when building a portfolio.
Number of stocks to hold
5 is the absolute smallest of stocks to hold in a portfolio. That also means five positions in five different market sectors. That is the least number to have the essential but minimum level of diversification. That implies holding 20% of your portfolio total in each position.
Also think of cash as a position. You do not have to be 100% invested in stocks. There are times when 100% cash can be best possible position.
A 5 stock portfolio works fine, if everything is going up. This strategy can work in a booming bull market but can be risky during other market conditions. However, a rapid and significant contraction of one position can quickly produce negative portfolio returns.
Consider the 5 position portfolio as one that offers minimum downside protection for the how many stocks to hold question. On the positive side, selling 5 positions in a downturn can be quickly and efficiently accomplished. Selling out the entire portfolio can happen in seconds or minutes. On the other hand, selling 30 positions or 70 positions could be impossible in hours or even days.
How fast can we sell?
In a sharp sudden downturn panic selling is a real risk. Wholesale dumping of an entire portfolio of many positions is technically possible. In seconds they can all be gone. But doing so in a panic most often devastates the capital base.
Panic behavior has serious psychological costs as well. But there is good news. You can learn about and make yourself ready for such circumstances. You can be ready when you know what to do. Over time we will discuss the multiple aspects of this sobering issue. Behaving well under stress can make and save money.
We will explore that issue in other discussions. This series will focus the discussion on the number of positions to hold and the size of the positions.
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Links to all parts of the White Top View series, Portfolio Counts and Sizes: