How Many Stocks Should You Own?

One of the most common questions investors ask is how many stocks they should hold. Too few leaves you vulnerable to company-specific risks, while too many dilutes your returns and becomes unmanageable. Here is how to find the right balance for your portfolio.

The Science of Diversification

Academic research provides clear guidance on diversification benefits:

What the Research Shows

• 10 stocks: Eliminates about 75% of unsystematic risk
• 20 stocks: Eliminates about 85% of unsystematic risk
• 30 stocks: Eliminates about 90% of unsystematic risk
• 50+ stocks: Minimal additional risk reduction

The Dangers of Too Few Stocks

Concentration Risk

With only a handful of stocks, one bad outcome can devastate your portfolio:

• 1-5 stocks: Extremely high risk, one company failure is catastrophic
• Company-specific events: Fraud, bankruptcy, regulatory issues
• Sector collapse: Industry-wide problems hit hard
• Example: Enron shareholders lost everything

Real-World Disasters

• Enron employees with concentrated stock holdings
• Lehman Brothers investors in 2008
• Tech-only portfolios in 2000 dot-com crash
• Single-stock company retirement plans

The Problems with Too Many Stocks

Over-Diversification (Diworsification)

Holding too many stocks creates its own issues:

• Diluted returns: Winners cannot move the needle
• Index-like performance: Why not just buy an index fund?
• Research burden: Cannot know 100 companies deeply
• Transaction costs: More positions mean more trades
• Rebalancing complexity: Harder to maintain target allocations

Signs You Own Too Many Stocks

• You cannot explain why you own each position
• Positions are less than 1% of your portfolio
• Returns closely match index funds with higher fees
• You have not researched holdings in months

Optimal Number by Investor Type

Passive Index Investors

• Approach: Buy total market index funds
• Number: Effectively thousands of stocks via 1-3 funds
• Management: Minimal, just periodic rebalancing
• Best for: Most investors, especially beginners

Active Stock Pickers

• Approach: Individual stock selection
• Number: 15-30 stocks is optimal for most
• Management: Regular research and monitoring required
• Best for: Those with time and interest to research

High-Conviction Investors

• Approach: Concentrated betting on best ideas
• Number: 8-15 stocks
• Management: Deep knowledge of each holding
• Best for: Experienced investors with proven skill

Position Sizing Guidelines

Maximum Position Sizes

• Conservative: No single stock over 5%
• Moderate: No single stock over 10%
• Aggressive: Top conviction up to 15-20%

Tiered Approach

Size positions based on conviction and research:

• High conviction (5-10%): Your best 3-5 ideas
• Medium conviction (3-5%): Good ideas, solid research
• Lower conviction (1-3%): Speculative or developing positions

Sector Diversification

Number of stocks matters, but so does sector spread:

Recommended Sector Limits

• No more than 25% in any single sector
• Aim for at least 5 different sectors
• Include both cyclical and defensive sectors

Example Sector Allocation

• Technology: 20%
• Healthcare: 15%
• Financials: 15%
• Consumer Discretionary: 15%
• Industrials: 10%
• Consumer Staples: 10%
• Other sectors: 15%

Practical Guidelines

Starting Out (Under $25,000)

• Consider index funds to get instant diversification
• If picking stocks, start with 5-10 positions
• Focus on learning and building knowledge
• Keep transaction costs proportionally low

Growing Portfolio ($25,000-$100,000)

• Can comfortably hold 15-25 stocks
• Meaningful position sizes become possible
• Develop a research routine
• Consider sector balance

Larger Portfolio ($100,000+)

• 20-30 individual stocks is reasonable
• Or core index funds plus satellite picks
• More flexibility in position sizing
• Consider tax implications of trades

How to Evaluate Your Portfolio Size

Questions to Ask

• Can I explain the investment thesis for each stock?
• Do I have time to monitor all positions?
• Is any position large enough to significantly impact returns?
• Am I diversified across sectors?
• What would happen if my largest position dropped 50%?

Warning Signs

• Cannot name all stocks you own without looking
• Have not checked some positions in months
• Own multiple similar companies in same industry
• All positions are tiny percentages

Summary

For most individual stock pickers, 20-30 stocks provides optimal diversification without over-complication. Fewer than 10 stocks is too risky unless you have exceptional conviction and skill. More than 40 individual stocks becomes unwieldy and may just replicate an index fund. Size positions according to conviction, maintain sector diversity, and ensure you can properly research and monitor everything you own. If in doubt, index funds provide instant diversification with minimal effort.

Learn more: concentrated vs diversified portfolios and portfolio diversification guide.