What Is the Ideal Number of Stocks You Should Hold in Your Portfolio?

Introduction

One of the most frequently debated questions among investors, financial advisors, and market analysts is: How many stocks should you ideally hold in your portfolio? While diversification is universally acknowledged as a key risk management strategy, the answer to the optimal number of holdings is not one-size-fits-all. It depends on multiple factors including an investor’s risk tolerance, investment horizon, market conditions, and portfolio management capabilities.

This article explores the concept of portfolio diversification, expert opinions, and market research to provide clarity on the ideal number of stocks for an individual investor to hold.

The Importance of Diversification in Portfolio Management

Diversification helps in spreading risk by investing across different companies, sectors, and sometimes geographies. The goal is to minimize the impact of poor performance by any single stock on the overall portfolio returns.

“Diversification remains the cornerstone of prudent investing. However, simply owning more stocks does not guarantee better risk-adjusted returns,” says Anita Sharma, a senior portfolio manager at Greenfield Capital.

Too few stocks can increase concentration risk, where the portfolio’s performance is highly dependent on a handful of companies. Conversely, owning too many stocks may dilute potential gains and increase complexity in management.

What Does Research Say?

Academic and industry research has aimed to find the “sweet spot” for portfolio size. A landmark study by Evans and Archer in 1968 demonstrated that owning 10 to 15 stocks can eliminate most unsystematic risk (risk specific to individual companies). Further studies have nuanced this finding:

• 10 to 20 stocks: Significant reduction in company-specific risk.

• 20 to 30 stocks: Marginal additional diversification benefits.

• Beyond 30 stocks: Diminishing returns in risk reduction, with increased management effort.

A 2011 report from Vanguard found that while diversification benefits plateau around 25 to 30 stocks, this number can vary depending on sectors and market volatility.

“Most retail investors would benefit from a concentrated portfolio of 15 to 25 stocks to balance diversification and manageability,” explains Rahul Mehta, CFA and head of research at CapitalWave Advisors.

Balancing Concentration and Diversification

Investors who hold fewer than 10 stocks run a higher risk of volatility, as negative events affecting any single company can disproportionately affect the portfolio. However, holding an excessive number of stocks, say over 50, may lead to:

• Difficulty in tracking performance.

• Reduced ability to invest meaningfully in high-conviction ideas.

• Increased transaction costs and tax implications.

Professional fund managers often maintain portfolios of 30 to 50 stocks but have dedicated teams and tools to monitor each holding closely.

Market Context and Portfolio Size

Market conditions also influence portfolio size decisions. In highly volatile markets, increasing diversification can help reduce risk, while in stable or bull markets, concentrated portfolios can amplify returns.

“During uncertain times, spreading investments across sectors such as technology, healthcare, and consumer goods helps shield portfolios from sector-specific shocks,” notes Mehta.

On the other hand, high-conviction investors may prefer fewer stocks in sectors they understand deeply, aiming to outperform broad market indices.

Investor Profile and Goals

The ideal number of stocks should align with an investor’s:

• Risk tolerance: Conservative investors benefit from broader diversification.

• Time horizon: Long-term investors may hold fewer stocks with strong growth potential.

• Investment knowledge and time: Active investors comfortable with research can handle more concentrated portfolios.

• Portfolio size: Small portfolios may struggle to diversify meaningfully due to minimum investment amounts per stock.

Practical Recommendations

For most individual investors:

• Aim for 15 to 25 stocks to achieve sufficient diversification.

• Include stocks from different sectors to reduce correlated risks.

• Consider adding index funds or ETFs if the portfolio size is small or if diversification is challenging.

• Regularly review and rebalance the portfolio to adapt to changing market dynamics.

Analyst Outlook

Experts agree that while numbers matter, quality and conviction are paramount.

“Diversification is essential, but owning 20 mediocre stocks is less effective than owning 10 well-researched, high-quality companies,” Sharma remarks.

The trend towards passive investing with index funds has also shifted investor focus from individual stock counts to overall asset allocation and risk management.

There is no universal magic number for how many stocks you should hold. However, based on research and expert consensus, holding between 15 and 25 well-chosen stocks, supplemented by other asset classes if possible, tends to offer the best balance between risk reduction and return potential for most retail investors.

Investors should tailor portfolio size to their unique circumstances, continuously educate themselves, and consider professional advice to optimize their investment outcomes.