With the equity market at an all-time high, you might be tempted to ride the bull run and increase your equity holdings. But rather than basing your buying decision on the number of stocks you should own, consider factors, such as your investment criteria and preference
The Indian stock market has witnessed significant volatility and contrasting moves by different investor groups recently. While foreign institutional investors (FIIs) sold shares worth almost `1.44 lakh crore from January to July 2024, domestic institutional investors (DIIs) offset this by buying shares in excess of about `2.88 lakh crore during the same period, according to data from National Securities Depository Limited (NSDL). The aggressive demand by the DIIs pulled up the Nifty 50 TRI (Total Return Index) by 22.23 per cent.
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With markets at such high levels, many investors may want to increase their exposure to equities due to the fear of missing out. But, given the inherent unpredictability in determining a stock’s value, the future might not always unfold as expected. One of the beacons of hope in this scenario is diversification, a fundamental strategy for building a stock portfolio. By spreading investments across various stocks, it minimises the impact of poor performance in any single company’s shares.
Investing into multiple securities can reduce the risks; and significantly enhance the chances of investment success. However, it is also important to consider how many stocks one should own in a portfolio to be able to balance risk and reward, especially in a market that has already moved up so fast.
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The ideal number of stocks in a portfolio is a topic of debate among experts. For instance, in the article The Superinvestors of Graham-and-Doddsville, Warren Buffett mentioned how American investor Walter J. Schloss owned over 100 stocks. Closer home, the WhiteOak FlexiCap Fund holds 118 stocks as of its July disclosure. Elsewhere, Motilal Oswal FlexiCap Fund in India, holds just 22 stocks, which is a concentrated portfolio.
On the other hand, American investor Stanley Druckenmiller once said, “I like putting all my eggs in one basket and then watching the basket very carefully.”
While practitioners have varying opinions, there is a broader consensus among academics. According to Edwin J. Elton and Martin J. Gruber, authors of Modern Portfolio Theory and Investment Analysis, most diversification benefits can be achieved by having 10-20 stocks in the portfolio, as going beyond this range provides diminishing marginal benefits.
Behavioural finance expert Meir Statman, through his research, has suggested that a portfolio should have at least 30-40 stocks to minimise unsystematic risk, which is specific to individual companies.
Similarly, Lawrence Fisher and James H. Lorie, professors at the University of Chicago’s Graduate School of Business, in their research article Some Studies of Variability of Returns on Investments In Common Stocks, stated that adequate diversification is achieved with a portfolio of 30 stocks.
With such varied opinions, how do you decide how many stocks to own? Let’s explore.
What You Should Consider
Whenever you are investing, always keep in mind your personal circumstances and preferences.
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To start with, you should gather enough knowledge and do adequate research before you decide to invest directly in stocks. The next step is to assess if you’ll be able to keep up with a certain level of research for all the stocks you hold because that may be a lot of work.
Says Shruti Jain, chief strategy officer at Arihant Capital: “The ideal number of stocks to include in your portfolio depends on various factors, and one important factor to consider, which is often ignored, is your propensity to stay informed about market news and the companies in your holdings.”
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This understanding is a key factor in successful stock investment, and generally, a minimum of 10 stocks is a good starting point.
Says Rahul Singh, chief investment officer (CIO)-equities, Tata Mutual Fund: “For retail investors, there’s no specific number for the ideal count of stocks; rather, it would depend on how they are approaching stock investing. My personal view is that if an investor wants to invest in stocks, it should be a small part of their overall portfolio as it is a lot of work. For the small portion in stocks, the count of stocks should be determined by the effort put into understanding the business and building the position. If they are conducting deep research and have a profound understanding of an industry or a company, then investing in a few stocks will suffice. However, if they are not doing extensive research, then either investing a fixed amount or strictly adhering to the discipline of not investing more than 2 per cent in any stock could be a good approach.”
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Building a portfolio involves juggling numerous variables, including risk capacity, investment style, and investment horizon. These factors determine whether you are looking for stocks that offer steady returns with stability (income stocks), companies that generate high returns in the short term (growth stocks), or fundamentally strong companies that are undervalued and have the potential to provide high long-term returns (value stocks).
Says Jain, “If you are creating a portfolio with a large number of stocks, you may be able to include income, growth, and value stocks in your portfolio and diversify across markets. A concentrated portfolio may not allow you to have a mix of different styles and is generally focused on one to two strategies.”
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What Should You Do?
While diversifying your portfolio is advisable, having too many stocks can be impractical. So, exchange-traded funds (ETFs) or mutual funds are, typically, recommended for individual investors who have other full-time commitments and cannot afford to spend time and effort to understand multiple businesses.
Although it seems that individual investors are likely to find it practical to own 10-20 well-selected stocks, they must strike a proper balance between the requirements of diversification and portfolio manageability.
The author is a Sebi-registered research analyst and a financial writer.