The topic of portfolio construction can be a tricky one.
After all, investing is an intensely personal endeavour where each investor has his own style and preference.
There are also a wide variety of popular investing styles out there, namely growth investing, income investing and value investing.
Each investment style has its merits and drawbacks.
Despite the differences, there are some common questions that investors have to answer.
A frequent query is about how many stocks you should hold in your portfolio.
Should you be more concentrated in a few good names such as blue chips, or be broadly diversified to reduce risk?
Let’s explore this topic further.
“Adequate” diversification
A key feature of your portfolio should be diversification.
“Diversification” here does not just involve a specific number of stocks, but emphasizes exposure to different industries and geographies.
For instance, an investor who buys a variety of banks such as DBS Group Holdings Ltd (SGX: D05), United Overseas Bank Ltd (SGX: U11), HSBC Holdings (LON: HSBA) and Hang Seng Bank (SEHK: 11) may feel he is diversified his stock holdings.
However, it should be noted that he is extremely concentrated as he only owns stocks that are from one sector (i.e. banking).
It is, therefore, important to diversify your holdings to ensure you own a variety of industries.
These could include essential services such as retail and electronics, as well as banks, telecommunication companies, REITs and so on.
This pandemic has shown the importance of being adequately diversified, as specific industries such as airlines, hotels and tourism have been badly hit.
However, other industries such as rubber gloves, vaccine manufacturers and internet-related companies are seeing an unprecedented boom.
Managing risks
The question of how many stocks you should have probably isn’t as important as the question of how much you should allocate to each position.
The topic of position sizing can be a long discussion.
But I shall be brief.
You need to remember that investing is not just about reaping rewards, but also about the management of risks.
Say you have a total of 20 stock positions. If we take 100% and divide it by this number, we get an average weight of 5% for each position.
Thus, the more positions you have, the less weight each will occupy within the portfolio.
Spreading out your risk is one method used to manage your exposure when a severe downturn occurs.
By increasing the number of companies you own in the portfolio, you can also dilute down the risk of any one stock blowing up and dragging your overall performance into the pits.
No magic number
Ultimately, there is no magic number when it comes to an ideal number of stocks.
I hold a total of 22 stocks currently.
These are spread out among two exchanges, namely Singapore (14 stocks) and the US (8 stocks), which include a wide variety of industries.
I have friends, though, who hold a more concentrated portfolio of fewer than ten stocks.
On the other hand, I have also witnessed peers who have done well with a portfolio of more than 50 stocks.
The common theme here is the analysis and thought process you put into each investment idea.
By assessing your risks and choosing quality companies, you would do just fine whether you have 15 or 50 stocks.
Get Smart: Stick with a comfortable range
In reality, as the number of stocks in your portfolio grows, the effort required to track them yourself also increases correspondingly.
A comfortable range for an average retail investor might be anywhere between 15 to 30 stocks, with around half to two-thirds being “core” positions.
But of course, some investors own more than one portfolio.
Our Co-Founder, David Kuo, has several stock portfolios, each centred around different themes. For example, within David Kuo’s Income Portfolio, we run two separate portfolios, one focused on income generating property stocks, the other on Malaysian stocks.
And there are plans to add more.
David categorises his stocks into income, growth and speculative stocks. The core of its portfolio is in reliable, income-generating stocks.
The rest can be classified as smaller, “satellite” positions that help to diversify your exposure, provide growth and to test new ideas.
That’s what David has as his growth and speculative stocks.
Your core companies should be those that generate the bulk of your returns and include the businesses you should monitor more closely.
And that’s what we do, day in, day out at The Smart Investor. We currently manage 4 separate stock portfolios in full view of our members. The Smart Dividend Portfolio now has 15 stocks that you’ll get instant access to once you join us as a member. Ultimately, you need to understand yourself well as an investor.
What are your investment goals? What are you seeking to achieve through investing?
If you can answer these questions, then you will know the right number of stocks to include in your investment portfolio.
With share prices battered to multi-year lows, many attractive investment opportunities have emerged. In a special FREE report, we show you 3 stocks that we think will be suitable for our portfolio. Simply click here to scoop up your FREE copy… before the next stock market rally.
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Disclaimer: Royston Yang owns shares in DBS Group Holdings Ltd.
