The number of stocks to have in a portfolio depends on several factors, including time horizon, risk appetite, diversification, and the investor’s knowledge, skills, and resources to manage their investments. While portfolio size depends on the appetite of the investor, studies suggest that owning between 8 to 15 stocks is an ideal range for most portfolios. This range strikes a balance between investing in a diverse array of companies and ensuring that the investor has the time and resources to manage these investments.
Importance of time horizon
The time horizon is the expected number of months, years, or decades an investor will be investing to achieve a particular financial goal. The time horizon affects the number of stocks in a portfolio because it determines the investor’s risk tolerance. For example, a growth portfolio ( Learn more about : How to create a growth portfolio ) consists mostly of stocks expected to appreciate, taking into account long-term potential and potentially large short-term price fluctuations. An investor seeking this portfolio has a high risk tolerance and a long-term investment time horizon. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because they can wait out slow economic cycles and the inevitable ups and downs of the market. Therefore, an investor with a longer time horizon may have a portfolio with more stocks than an investor with a shorter time horizon.
Diversification
The number of stocks in a portfolio also depends on the investor’s diversification strategy. Diversification can help reduce risk by spreading investments across different stocks and sectors. An investor should not overemphasise on one particular stock to ensure that their portfolio is not too risky. For example, it’s not wise to have >50% of the total capital allocated in one stock or same sector. The portfolio should be diversified enough in terms of stocks & sectors. Biggest advantage of diversification is hedging against any cyclical changes in a sector that might affect the stock price.
Diversification can also be achieved by simply selecting and investing in stocks from different indices – Nifty 50, Nifty Next 50, Nifty Midcap, Nifty small cap, ( Browse stock by Indices or sectors).
In summary, the ideal number of stocks to have in a portfolio is a personal choice based on an investor’s goals, preferences, and resources. While owning between 8 to 15 stocks is a generally agreed-upon range for most portfolios, diversification is a key factor to consider when constructing a portfolio.