Stock advice: How to know the right number of stocks for you

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific stock advice. Each Investor Toolkit update gives you a fundamental piece of investment strategy, and shows you how you can put it into practice right away.

Tip of the week: “Too many stocks are as bad as too few.”

The right number of stocks for you to own depends in part on where you are in your investing career.

  • The beginning investor: When they’re just starting out, most investors have modest amounts of money to invest. Even so, our stock advice is that you should invest at least several thousand dollars at a time, even if this means you can only buy a handful of stocks. Otherwise, your broker’s minimum commission will work out to too high a percentage of your investment on each purchase.
  • Pick at least one stock from each of the 5 sectors. At the outset, you should aim to invest in a minimum of four or five stocks. Our stock advice is to pick one from each of most, if not all, of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities).

    You can buy them one at a time, over a period of months or even years, rather than all at once. After that, you can gradually add new stocks to your portfolio as funds become available, taking care to spread your holdings out as we advise.

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  • Add new stocks as your portfolio’s value increases. When your portfolio gets into the $100,000 to $200,000 range, you should aim for perhaps 15 to 20 stocks. If you’re married, it’s best to treat your family holdings as one big portfolio, even if you and your spouse keep your money separate. That way, you can be sure you aren’t operating at cross purposes, or investing too much of the family fortune in a single area.
  • Our 3-part stock advice is key. When you get above $200,000 or so, you can gradually increase the number of stocks you hold. When your portfolio reaches the $500,000 to $1 million range, 25 to 30 stocks is a good number to aim for.

    Of course, you may fall a few stocks below that range, or go a few above it, particularly when you’re making changes in your holdings. That won’t matter if you follow our three-part tsinetwork.ca stock advice: invest mainly in well-established companies; spread your money out across the five main economic sectors, and downplay stocks that are in the broker/public-relations limelight.

Our upper limit for any portfolio is around 40 stocks. Any more than that and even your best choices will have little impact on your personal wealth.

Next Wednesday, March 2, 2011, Investor Toolkit will give you our stock advice on how to place an order when investing in the stock market.

You can get our latest analysis, including our clear buy/sell/hold stock advice, on dozens of Canadian stocks you may be considering buying in The Successful Investor. What’s more, you can get one month free when you subscribe today. Click here to learn how.

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