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How many stocks is too many in a portfolio?

Diversification

how much stock is too much

How many stocks should you own? What is too much ?

Investors are often left wondering how many stocks they should have in their portfolio. It’s a good question, but often it may not be the right one. What matters the most is what constitutes the portfolio and the level of concentration in a single sector of the economy.

You are probably familiar Peter Lynch, who gained his considerable fame managing Fidelity’s Magellan Fund. The fund earned an annualized return of 29% during his 13 years running it, more than twice what the S&P 500 earned during that time.

During his tenure as manager of the Magellan Fund, Lynch held as many as 1,400 stocks at some point. Such a large number didn’t prevent him from generating great returns. But it’s essential to understand that he did not invest in new businesses in an effort to be more diversified.

Peter Lynch on Making Money in the U.S. Stock Market | MOI Global
Famous investor Peter Lynch

He simply invested in a compelling investment every time he came across one

Lynch believes investors should own however many “exciting prospects” that they are able to uncover and that pass the selection process. In short, while you could have not enough stocks, there is no such thing as too many, as long as you have the right filtering process. Keeping up with news of a particular stock takes time; if you dont have the time to follow on your investments, then you should reduce your portfolio.

In a 1985 Barron’s interview, he described his strategy behind the fund:

  • 30%-45% of the fund in growth stocks.
  • 25%-35% of the fund in conservative stocks.
  • The rest would be in cyclicals and special situations.

This was written in 1985, i think right now you need to allocate a minimum of 5 to 10% into cryptocurrencies, such as Ethereum or Bitcoin, to be able to stay competitive. It’s no wonder that Cathie Woods, from Ark Invest, is so big on cryptocurrency.

Reducing the volatility

It’s very common for retail or pro traders to think that they are taking too much company risk as soon as a stock reaches 3% to 5% of a portfolio.

Yet, many are willing to take a 30-year mortgage to buy a single family home, or buy a new car and all with a down payment that represents the vast majority of their financial assets at some point in their life.

Making a concentrated investment requires appropriate due diligence and usually involves a predefined goal and time horizon. If you know what you’re buying and understand clearly the upside opportunity and downside risk, making a concentrated investment isn’t necessarily reckless. And it can actually be on of the best decisions will you ever make.

Abnormal returns, after all, can only come from abnormal portfolios.

Investors who own dozens of ETFs may be properly diversified with limited draw-downs. But the alpha they can generate is likely vanishing all the same. At some point, you might as well put everything in a global index fund ETF such as the Vanguard Total Stock Market and get on with your life.

And if you dont have time, or you dont care enough about following the market, that would be the wise thing to do.

It comes down to what’s in the portfolio, more than how many different stocks you own

It’s important to note that while Warren Buffett holds about 50 positions in his portfolio at Berkshire, his top 5 holdings alone represent close to 71% of his allocation.

Warren Buffett's Investing Philosophy - StockBasket Blog
Berkshire founder, Warren Buffet

If you’ve been investing for a while, there’s a good chance your best ideas are already sitting at the very top of your portfolio. Most of the time, your biggest holdings are where new funds should be allocated when the story and opportunity is intact, the same way Buffett and Munger have added diligently to Coca-Cola for years.

Or like Roaring Kitty, that made a huge bet on GameStop. It paid him off bigly in the end. Ranking in millions and millions of dollars.

What can i say ? He just likes the stock !

The main factor in determining your allocation should be the nature of the investment opportunity

Your portfolio allocation should be a reflection of your degree of knowledge and certitude. The size of an investment should be proportional to your probability of success.

When the evidence of the success of a business is becoming more overwhelming over time, it makes perfect sense to let a position take a larger part of a portfolio, by letting it run or adding to it.

Here are some other trading tips that might help you

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