Investors building a portfolio for the first time may be wondering how many stocks they should invest in. Diversification certainly plays a role, but it ultimately comes down to the number of assets you’re comfortable monitoring.
How many stocks should I own?
There’s no one-size-fits-all approach to investing in the stock market, but many investors tend to hold 10 to 30 stocks in their portfolio. Investors new to the market may prefer a smaller portfolio of 10 stocks, give or take — while more experienced traders may maintain a portfolio of 30 or more.
In their book, Investment Analysis and Portfolio Management, financial analysts Frank Reilly and Keith Brown suggest the sweet spot lies between 12 and 18 stocks — a range that successfully capitalizes on 90% of the benefits of diversification. Others, like Burton Malkiel, author of A Random Walk Down Wall Street, suggest that investors need closer to 20 stocks to reduce risk by up to 70%.
The more positions you maintain, the more maintenance your portfolio requires, including market research and staying up-to-date on industry news. The bottom line? You need to monitor the performance of everything you purchase. If you’re not willing to keep an eye on it, don’t buy it.
How to invest in more stocks if you don’t have a lot of money
If you’re short on funds and new to the market, there are several investment options with built-in diversification. Each of the following can be purchased through a brokerage account:
ETFs.Exchange-traded funds are publicly traded funds that track a specific index, sector or industry. The purchase of a single exchange-traded fund adds a healthy dose of diversification to your portfolio, as ETFs contain a variety of stocks from companies within the sector or industry they track.
Index funds. An index fund is a mutual fund or ETF that tracks a market index. A market index tracks a list of stocks from companies within a specific sector as an indicator of how that sector is performing overall. Index funds offer exposure to an entire index, many of which track hundreds of stocks. In Canada, the most popular index to track is the S&P/TSX Composite. Other popular Canadian indices include the S&P/TSX 60 and the S&P/TSX Venture Composite Index. In the US, the most popular index is the S&P 500. The Russell 2000 is useful for tracking small-cap stocks, while the Dow Jones Industrial Average is useful for tracking large-cap stocks.
Mutual funds. A mutual fund is a collective investment that allocates money across stocks, bonds and other assets. Mutual funds are professionally managed by fund managers and pool the funds of multiple investors to broaden the fund’s reach and market exposure. Like ETFs, mutual funds contain a basket of assets, offering greater diversification than the purchase of a single stock.
When you pour all your money into a single stock, the success of your investments hinges entirely on the performance of a single company. While you can earn potentially higher returns, you may also face equally sizable losses.
Think your investments are safe with blue-chip stocks, like Apple, Walmart or Disney? Think again. No company, regardless of sector, industry or time in business, is risk-free. And that’s because all stocks are exposed to company risk and market risk.
Company risk, or unsystematic risk, is the risk associated with investing in a single company. And while it’s typically more of a gamble to invest in startups and small-cap stocks, there are risks to investing in larger companies, too.
Market risk, or systematic risk, applies to all companies, regardless of size, as some events — like natural disasters and political upheavals — have the potential to impact the entire market.
The best way to insulate your portfolio from potential loss is to diversify your investments, holding multiple stocks across a spectrum of industries. It’s impossible to avoid market risk, but by investing in more than one company, you reduce your portfolio’s company risk exposure.
Ways to reduce your investing risk
There are numerous ways to manage your portfolio and reduce the risk of loss.
Rely on a professional
If you need help building a portfolio from scratch, consider a financial adviser. There are numerous investment platforms that offer portfolio management services, but you’ll pay a fee to access the service — typically a percentage of your total assets.
Your adviser will sit down with you to discuss your investment goals and help you determine your risk tolerance. Once your portfolio is funded, your adviser takes care of the rest. You may meet with your adviser once or twice a year to discuss your investments, but you won’t be actively managing your portfolio. This is an option best suited for hands-off investors.
If you do want to manage your investments but would prefer some guidance before you pull the trigger, consider hiring an investment fiduciary. This person can provide occasional guidance and feedback on your portfolio while leaving the buying and selling process in your hands.
Do your research
If you’re eager to wet your feet in the world of investments, open a self-directed brokerage account and build your portfolio yourself. Hand-picking your own stocks means doing your homework, so explore the research tools provided by your trading platform as well as third-party options like free stock screeners and investment newsletters.
Learn how to value a stock before adding it to your portfolio by comparing data metrics like price-to-earnings ratios and free cash flow. And make sure your money is diversified across assets, market sectors and industries to reduce the risk of loss.
Use a robo-advisor
Robo-advisors are digital financial advisers that rely on algorithms to manage the assets in your portfolio. Some brokerages like Wealthsimple offer robo-advisors alongside self-directed brokerage accounts. Others, like CI Direct Investing and Moka, offer robo-advisor services and nothing else.
Robo-advisors operate in much the same way as portfolio management services overseen by human advisers. Your investments are selected for you at the robo-advisor’s discretion and you can monitor your portfolio by logging into the platform.
Small portfolios are easier to manage, but too few stocks can increase your company risk exposure. Ultimately, the ideal number of stocks for your portfolio comes down to how many positions you feel comfortable maintaining.
Market risk, also called systematic risk, is the risk you encounter any time you invest in the stock market. It includes events that impact the entire market, like natural disasters, political shifts and economic swings. Market risk is static and all-encompassing — there’s no way to avoid market risk because it applies to all stocks, regardless of sector or industry.
Company risk, also called unsystematic risk, is the risk you take betting on a specific company. Company risk varies widely. It’s typically riskier to invest in a startup than it is to invest in a household name like Disney, but big companies are far from infallible. There’s simply no such thing as a risk-free investment, regardless of market sector, industry or time in business.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
Shannon Terrell is a lead writer and spokesperson at NerdWallet and a former editor at Finder, specializing in personal finance. Her writing and analysis on investing and banking has been featured in Bloomberg, Global News, Yahoo Finance, GoBankingRates and Black Enterprise. She holds a bachelor’s degree in communications and English literature from the University of Toronto Mississauga.
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