{"id":1738,"date":"2019-12-02T12:27:00","date_gmt":"2019-12-02T12:27:00","guid":{"rendered":""},"modified":"2025-04-07T16:47:00","modified_gmt":"2025-04-07T11:17:00","slug":"how-many-stocks-should-you-own","status":"publish","type":"post","link":"https:\/\/www.equentis.com\/blog\/how-many-stocks-should-you-own\/","title":{"rendered":"How Many Stocks Should You Own?"},"content":{"rendered":"
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Successful investing is all about balancing risk and reward, which is only possible through careful portfolio diversification. Too much diversification can deter gains while sticking to 1-2 stocks increases the risks. However, a balanced approach can help investors create wealth in a systematic way. But how the quintessential question remains? How many stocks should you own to achieve optimal diversification? This story will help you design an optimal portfolio that suits your situation.<\/p>\n\n\n\n

The Indispensable Role Of Diversification<\/h2>\n\n\n\n

Diversification is a prudent strategy to ensure proper portfolio and risk management. Diversification in a stock portfolio is an attempt to lessen the inherent risk of holding only one or one kind of stocks. This is generally done by investing in companies across diverse sectors, industries and even growth cycles.<\/p>\n\n\n\n

Spreading investments<\/a> across various sectors or industries with low correlation to each other can help control the risks that a portfolio with very few stocks would be vulnerable to.<\/p>\n\n\n\n

It is expected that since the correlation between the stocks within a portfolio is less, all stocks will not move up or down at the same time or at the same rate. So the overall portfolio is protected, as some stock may go up when others are going down. In the case of long-term investment, this tends to ensure a more consistent portfolio performance.<\/p>\n\n\n\n

The problem arises when this concept of diversification is taken a little too far that it fails to serve its very purpose and if stretched too far, can even hurt portfolio returns. Hence, a proper understanding of the intricacies involved is recommended before an investor gets started with portfolio allocation.<\/p>\n\n\n\n

Diversification Or Di(WORSE)ification<\/h2>\n\n\n\n

The basic premise of diversification is to reduce the risk. But it is very important to understand and remember that the no matter how diversified the stock portfolio is, the risk can never be eliminated though it can be reduced to a certain extent.<\/p>\n\n\n\n

So just adding more and more stocks in the portfolio will not eliminate the risk.<\/p>\n\n\n\n

Each time a new stock is added to the portfolio, it lowers the risk of the portfolio but by a smaller and smaller amount each time. That\u2019s not all. If the stocks are added by order of (at least theoretical) potential returns, then each additional stock lowers the expected return too!<\/p>\n\n\n\n

But this doesn\u2019t mean that we can or should hold a 1-stock portfolio. The risk is just too high and can have disastrous consequences if the investment thesis is proven incorrect eventually.<\/p>\n\n\n\n

Once you begin adding stocks to a portfolio, there will come a point where the decrease in expected gains<\/strong> will surpass the marginal benefit of risk reduction.<\/strong><\/p>\n\n\n\n

When there are too many stocks in the portfolio in the name of diversification, then it simply means that the portfolio does not own the highest conviction and best quality stocks.<\/p>\n\n\n\n

How Much Diversification Is Too Much?<\/h2>\n\n\n\n

The adequate level of diversification is debatable. For the most part, the answer depends on the type of investor you are, which again depends on:<\/p>\n\n\n\n