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How many stocks should I get?
If you ask how much stock is the best to get, you might never find an answer, let alone an accurate one. You might want to change your question. Instead, ask about the factors that affect the stocks in your portfolio. Investors should consider many factors such as the location and type of investment, the investment’s time horizon, market conditions, propensity for reading market news and being updated with the holdings. These considerations should go first before the investor can come up with the correct number of stocks.
Systematic and unsystematic risk
Most investors diversify their portfolios by choosing different investment vehicles because they want to avoid massive risk exposures. With that being said, they engage in unsystematic risk. It is a risk that is relative to a specific company or industry. If there is an unsystematic risk, we also have systematic risk. It is something that investors cannot diversify. Why? To explain this, let us cite an example. Some risks involve economic downturns that hurt the stock market.
A theory called “Modern Portfolio” says that it can avoid unsystematic risks if the portfolio is well-diversified. In fact, it can even help prevent these risks to a level as if they do not exist. All of this can be possible while expecting a return from a portfolio that has massive risk.
How about transaction costs?
An investor with more systematic risk for a potentially high return does not experience more return potential for unsystematic risk. More equities in your portfolio mean lesser unsystematic risk exposure. For instance, a portfolio that holds three stocks from the same industry is riskier than having 15 stocks from different sectors and industries.
But if owning more stocks from different sectors and industries is less risky, does that mean I should pay more transaction fees? The transaction fee is also something that an investor should consider because it can add up in the long run. So, there is a need to keep stocks at a minimum or a decent number. We cannot give an accurate number. However, we can say that the number of stocks that move around in the US freely is approximately 20 to 30. When commissions and costs were higher, a research states that a 20 to 30 range of stocks is a decent number for this question.
New studies are saying that an investor should take advantage of low transaction fees from online brokers. There is no exact number, but they suggest that holding more or less 50 stocks will be good for a portfolio. However, let us not forget that these stock market facts that we have in the past and today may not be the same in the following decades.
At the end of the day
Most investors would keep 15 to 20 stocks as a minimum. Some investors who do not want to do extensive research may turn to index funds and ETFs to diversify their portfolios easily and quickly. These are investment vehicles that allow an investor to buy a basket of stocks in a single transaction.
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