There is one question that always comes to every stock investor’s mind that is “how many stocks should be in his portfolio?” They always get confused to understand that how many stocks are too few or how many stocks are too many. Too few stocks are suggested by the stock advisory company to investors for the high risk that can significantly reduce the value of the entire portfolio by a share. On other hands, too many stocks can expand the portfolio and through any stock; there will be the only minimal impact on the overall portfolio.
There are many investors, who follow different types of method for this. Some investors believe in adding the number of stocks to increase the size of the portfolio. Others connect it with the number of investment opportunities available. Some connect it to the age of the investor. There is no pre-defined method to determine the ideal number of stocks in a portfolio. The main aim of this blog post is to help the investors to reach the ideal number of stocks in their portfolio.
1. Minimum number of stocks in the portfolio
Here is a very simple example to understand it, which are husband and wife. It is very normal to increase family members after marriage and our responsibilities to taking care of partner’s wishes and dream. Same thing applies to the portfolio. Whenever the investors do investment on stock market then he always needs to follow different companies to add in the portfolio equal to family members. Example: If you have a family of 2 members then adds at least 2 companies in your portfolio. It will be helpful for you to monitor the income of the company, business model, business, track record, daily price movement etc. The every investor should have at least two stocks in their portfolio from different industries. It is the minimum number of stock, to get any diversification benefit to reduce risk.
2. Maximum number of stocks in the portfolio
The researchers have proven that the additional diversification benefit, which increases with the addition of a new stock in the portfolio, decreases after 10 stocks. If an investor includes over 30 stocks in the stock portfolio, then it will not reduce any risk in the portfolio. On the other hand, this portfolio can be unnecessarily large and the good performance of any single stock will not produce the meaningful impact on overall portfolio performance. Therefore, increasing the number of stocks more than 10 stocks can prove counterproductive for the investors. Therefore, the investor should keep the number of stocks in his portfolio within 2 to 10.
Regular monitoring of every stock is always required in the portfolio by the investor. It is a mixture of constant monitoring, annual monitoring, and quarterly monitoring. Monitor every stock; there will be the detailed reading of at least four quarterly statements and an annual report every year. In addition, reading news and updates about the company are essential in order to keep an eye on every stock. The investor should have the stocks that he can monitor efficiently, can give the time and effort. Inability to monitor and not staying updated about your stocks can present you with amazing phenomena related to your portfolio stock and increase the risk.