How Many Stocks Should You Own in a Portfolio?
The concept of diversification stems from the idea of not putting all your eggs in one basket. By spreading your investments across different sectors, industries, and geographic regions, you reduce the risk that any one event or economic downturn will significantly harm your portfolio. But too much diversification can dilute your returns, making it difficult to outperform the market.
Let’s start at the top: Is it possible to be too diversified?
Consider an investor who holds over 100 stocks. This portfolio mimics the index so closely that it essentially performs the same as an index fund. This is where we get into the question of diminishing returns. Beyond a certain point, adding more stocks to a portfolio doesn’t reduce risk meaningfully. Instead, it adds complexity, making it harder to track individual company performance, earnings reports, and market news.
Now, think about concentration. Some of the world’s most successful investors, including Warren Buffett, advocate for holding fewer stocks in a portfolio. Their logic is simple: the more stocks you hold, the more average your returns become. By concentrating your investments in your best ideas—those companies you believe in the most—you give yourself the chance to achieve outsized returns.
So, how does the average investor find the right balance?
A study by Morningstar suggested that owning between 15 and 20 stocks is the sweet spot for most individual investors. At this level, you can achieve approximately 85-90% of the diversification benefits of owning an index. It’s a balance between reducing risk while still having enough concentration in your best ideas to make a difference.
But that doesn’t mean you should always stick to exactly 20 stocks. Your risk tolerance, financial goals, and the time you have to manage your portfolio should all influence the number of stocks you own.
Take a closer look at the benefits and drawbacks of different portfolio sizes:
| Number of Stocks | Benefits | Drawbacks |
|---|---|---|
| 1-5 | High potential for outsized gains, easy to track | Extremely high risk, sector concentration |
| 6-15 | Potential for good returns with less risk | Still vulnerable to company-specific risks |
| 15-30 | Strong diversification, reduced risk | Harder to beat the market, requires more attention |
| 30+ | Very low individual stock risk, mimics index | Likely to perform similarly to a mutual fund, low upside potential |
So, how does reverse-chronological thinking apply here?
Let’s assume you’re now questioning whether you’re over-diversified or under-diversified. You’ve been investing for several years, and your portfolio has grown, but you’re noticing your returns aren’t beating the market. This is where many investors find themselves after years of accumulating stocks in various sectors, industries, and geographies.
Maybe you started with a focus on tech stocks, drawn by the explosive growth of companies like Apple, Google, and Amazon. Over time, you branched out into healthcare, believing in the long-term growth prospects due to an aging population. Then, as the global economy fluctuated, you added some energy stocks for safety. Fast forward to today, and now your portfolio resembles the S&P 500. But the question is: Are you happy with average market returns?
Tim Ferriss often speaks about focusing on the few things that make the biggest impact. In this context, holding a concentrated portfolio might be your best bet for outperforming the market. A smaller, well-researched selection of 15-20 stocks could give you the edge you’re seeking. It reduces the noise, allows you to keep an eye on your key investments, and gives you the mental bandwidth to dig deep into company reports, understanding not just where they are today, but where they’ll be five years from now.
But remember, if you’re going to concentrate your portfolio, you need conviction. That means doing your homework on each stock, understanding its business model, growth prospects, and potential risks. Diversification can help when you’re uncertain, but if you’re well-researched and confident in your stock picks, less is often more.
Think of it this way: Would you rather hold 50 stocks you know little about or 15 that you understand deeply? The answer might be obvious, but putting it into practice is another matter.
Now, before we dive into the specific recommendations, let’s consider a few real-world case studies. Peter Lynch, one of the greatest mutual fund managers of all time, ran the Fidelity Magellan Fund with a strategy of holding up to 1,400 stocks at one point. But even Lynch admitted that most of the gains came from a select few companies. Buffett famously said, “Diversification is protection against ignorance.” In his view, wide diversification only makes sense when an investor doesn’t know what they’re doing. For him, focus is key.
So how many stocks should you own?
Ultimately, it depends on you. If you’re new to investing or don’t have time to analyze companies in depth, diversifying across 20-30 stocks might be a safer option. For the seasoned investor who has the time, skill, and conviction, a portfolio of 10-15 well-chosen stocks could outperform.
The final takeaway? There is no one-size-fits-all answer. What matters most is how much risk you’re willing to take, how much time you can dedicate to managing your portfolio, and how well you understand the companies in which you invest.
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