Monday, March 19, 2007

How Many Securities Should You Have?

I’ve been asked this question before and my general rule of thumb is 20. I touched on this in my January post about diversification however I’ll just rehash it a little bit. I think that if you own over 20 stocks you run the risk of becoming too diversified. If you’re too diversified you basically become the market and if that’s the case why waste the time and commission fees buying individual stocks? Simply buy some low MER index funds and get it over with, because if you diversify too much you’re going to mimic the index anyways.

There are of course exceptions, for example if you’re pursuing a high risk strategy such as penny gold stocks it would probably be wise to create a basket of these high risk stocks and hope for a few big winners. Additionally, if your portfolio is under $70,000 I don’t think that you should be aiming to hold 20 stocks. I believe that if you can’t commit a minimum of 2.5% to 3% of your portfolio to a stock you probably shouldn’t buy it. I will often buy a half position ie- 2.5 to 3% of a stock and if it increases and grows into my target 4 to 8% of my portfolio great! but if not I will wait and average down to increase the weighting. You might have noticed that I have a few holding under 2.5% (which I better explain) --- BA.UN was spun off of BCE and the commission to sell it doesn’t make it worth while. The other 2 mutual funds I’ve owned since I was 16 – bought on the recommendation of a broker and haven’t looked at or added to since. Incidentally they are some of my worst performers.

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice)


Investoid said...

I think 20 is a good rule of thumb for the reasons you specified, but I think you need to adjust this figure if you're holding ETFs or mutual funds (particularly broad market index funds).

These types of holdings will give you the market exposure you need, which in turn reduces the amount of diversification needed from other sources. For instance, you may want to purchase individual securities in sectors or geographical locations that your ETFs or mutual funds have little or no representation in.

Myself, I purchase individual stocks for the sole purpose of achieving above market (or sector) returns, with the rest of my assets in broad market and sector ETFs. Thus my magic number is a fair bit lower than 20 (probably around 10-12).

advantage said...

Currently I hold 10 stocks and I am quite comfortable with my level of diversification, and I do not think I am taking on any undue risk. However I would not rule out increasing my holdings to the 15-20 range over time and I agree that more than 20 can become redundant.


One should own a the very least 10 different stocks that are diverse that is their all in very different sectors.