How Many Stocks You Should Have in a Portfolio to Begin Stock Investing??

“I think the secret is if you have a lot of stocks, some will do mediocre, some will do okay, and if one or two of 'em go up big time, you produce a fabulous result.” - Peter Lynch

Well, that is the idea behind stock diversification, expressly to minimize risk and maximize returns.  Broadly speaking, a portfolio made up of various stock types will, on average, produce superior long-term returns and reduce the risk of any single holding or investment.

But, stock diversification is an ambiguous term. As the question is how many stocks should I have in my portfolio to achieve the desired level of diversification?

Well to answer this question, you’ll have to seek more context.

And this is where this story gets interesting.

According to Benjamin Graham, defensive investors should hold between 10 and 30 stocks in their equity portfolios.

On the contrary, Buffett stated in his speech in the University of Florida

"If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be terrible mistake. Very few people have gotten rich on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would say for anyone working with normal capital who really knows the businesses they have gone into, six is plenty, and I probably have half of what I like best. I don't diversify personally."

Clearly, this approach to diversification is unquestionably unconventional. Buffett in the past had invested as much as 40% of his portfolio in a single stock.

So, while it may appear that many people have an opinion on the "ideal" number of stocks to keep in a portfolio, the truth is that there is no single accurate answer to this.

Keeping the right number of stocks in the portfolio is no easy feat. As, Diversification is a tried-and-true approach for lowering investment risk when done correctly. However, too much diversification can turn into stock "diversification," and perhaps can be a bad thing.

As, the fact is that there is no one-size-fits-all approach. and numerous aspects must be considered when determining the right quantity of stocks to include in your portfolio. Hence, to reach a suitable ending on this long-standing dilemma have a look at the following factors when deciding on the ideal number of stocks to include in your portfolio.

Risk Tolerance

Risk tolerance refers to how much of a loss in a portfolio an investor is ready to accept. Generally, an aggressive investor prefers a less diversified portfolio where the risk increases but profit on the portfolio is possibly higher. As, an investor that put all of his assets into Info Edge Limited five years ago would certainly be much better off than an investor that owned a broadly diversified portfolio over the same time frame.

On the other hand, Conservative investors would prefer a diversified portfolio that decreases risk but the net profit on the portfolio may be lower. As a single stock's outstanding performance has a minimal beneficial impact on the total portfolio.

Investment time horizon

Almost all long-term investments exceed the market. Some stocks do deliver overnight returns, but this is not a portfolio that can be sustained. Value investors essential matrics who want to build a good stock portfolio shouldn't count on quick profits. Instead, investing in blue-chip stocks for long run can provide consistent returns, lower risk and high dividend pay-out.

So, the higher the duration of your investment, the lesser you need to diversify to maximise returns.

Focused management

You should look at the organization's management to get a better idea of their development potential. You can invest in stocks to optimise profits if the management is focused and growth-oriented. So, before you acquire their shares, do your homework on the firm to build a profitable portfolio.

Role of a cash buffer

A cash buffer, also known as cash on hand or cash reserve, is a sum of cash kept aside for future usage or spending.

Always ensure you have enough liquidity to handle unexpected expenses for the curves life tends to throw at you. On average, it is recommended that you maintain a cash buffer equal to 6 months of your expenses.

However, the financial crisis has demonstrated beyond a shred of doubt that being fully invested at any given time may not be the best option. Since, a catastrophe might strike at any time and, the correction might be considerably smaller than your risk tolerance.

Withdrawing your investments at this time might result in a loss.Having a financial cushion is thus a good practise. With 15-20% of the cash stability of the whole portfolio, you've got room to make investments although the marketplace is stagnant.

Conclusion

The number of stocks or other financial instruments that should be included in a portfolio varies depending on the demands of the particular investor. But, you should think about the underlying drivers of the stocks you own in addition to the quantity of equities.