Well, this is the question I get asked many times at my workplace from my numerous colleagues as well as friends.
What I have seen in my investing career is that people tend to own as many stocks as they can. Without keeping a check on the performance of those stocks, they keep on adding new stocks which they find in newspaper clips or as tips from friends. In fact, I personally know a friend of mine who owns around 120 stocks in his portfolio. Does he really need to over-diversify his portfolio in order to earn money from stocks? No!! Over-diversification just dilutes the returns. In other words, it’s not even diversification. It’s di-worsification (a word given by Peter Lynch).
Too many stocks in a portfolio minimize your returns. Whereas, if someone holds too less, it may get exposed to a risk of underperformance. Because even if a single stock underperforms, it will drag down the performance of the whole portfolio.
The question is – How many stocks should be added to a portfolio? Ideally, one should have 10-15 stocks in a portfolio. Selecting a range of stocks from diversified sectors and industries tend to give stellar returns. A concentrated portfolio tends to perform better than an over-diversified portfolio.
I am not saying that you can’t keep more than 15 stocks in your portfolio. Of course, you can but it shouldn’t hamper your portfolio’s performance. As long as you are okay with your performance, you can add as many stocks in your portfolio as you can.
Benefits of keeping a concentrated portfolio
Listed below are few of the advantages of keeping a concentrated portfolio.
- Rocking Performance: If a selection of stocks is done with proper due diligence and research, you tend to gain a lot of profits from the performance of those stocks. All you have to follow is – Buy Right, Sit Tight – philosophy. You just need to buy your picks and hold onto it for a long period of time in order to achieve maximum gains.
- Effective Monitoring and Research: With less number of stocks in a portfolio, you’ll be able to monitor your portfolio effectively. With a large portfolio, monitoring the stories of each stock can become cumbersome.
So make sure that you don’t play with your returns by over diversifying your portfolio. A healthy portfolio of 10-15 stocks will work really well for you in the long term.
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