I’ve been asked this question before and my general rule of thumb is 20. I touched on this in a January, 2007 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.
Thursday, May 8, 2008
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4 comments:
You might mention that two different sets of 20 stocks each are not created equal. The stocks within one's portfolio need to be from different sectors, so if, by some strange set of events, all bank stocks were dragged down, you'd have consumer, health, etc.
Joe
for a portfolio of 10k primarily in mid-small caps, do you recommned being at or about the 20 stock mark or having much lower than that, say 10-12?
joe,
I agree that diversification is important.
jhantu,
For a portfolio of 10K I certainly wouldn't recommend 20 holdings as your commissions would be eating a huge percentage of your capital. Personally, with only 10K the maximum amount of holding that I'd own would be 4 but please keep in mind that I am not a financial advisor so please do your own research or consult a professional before buying or selling.
That is a good question. In my income portfolio, I am targeting 25 stocks. If I get over that it becomes difficult to track and manage.
Best Wishes,
D4L
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