Every Wednesday, we publish our “Investor Toolkit” series. Whether you’re a new or experienced investor, these weekly updates are designed to give you advice on investing, including specific stock market advice. Each Investor Toolkit update gives you a fundamental piece of our investment strategy, and shows you how you can put it into practice right away. Tip of the week: “While some investors may have too few stocks in their portfolios, the more common mistake is to have too many stocks.” The right number of stocks for you to own depends in part on where you are in your investing career. It makes sense that you should have fewer stocks when you begin and add more as you advance. But there is an upper limit to the number of stocks you should own—beyond that limit, the stocks in your portfolio can begin to neutralize each other and your returns can suffer.
- The beginning investor: Most investors start out with modest amounts of money. Still, we believe 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. You should plan to invest in a minimum of four or five stocks right from the beginning. Pick one from each of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities). If you can’t manage to own one from each of the five when you start out, try to cover as many of the sectors as you can.
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 recommend.
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- As the value of your portfolio rises, add new stocks. When your portfolio reaches 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 one area.
- Our 3-part investment 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 hold.
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 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 stocks can begin cancelling each other out. Even your best choices will have little impact on your personal wealth. COMMENTS PLEASE How old were you when you began investing in stocks? Did you have a plan in mind? Looking back, what would you have done differently? Let us know what you think in the comments section below. Click here.
