This is possibly the most open ended question about stock investing and has no correct answer. Honestly, there is no rule here. I had written a post on this sometime back where I said, personally, I never try to own more than 5 stocks. That works for me. In fact, if you calculate the return of what I included as the ideal stock portfolio in that post, it comes to 115.10 % in less than 16 months. Below, I am reproducing the stocks which I suggested in an ideal stock portfolio on that day – 21 November 2013.
|Stocks||Price @ Recommendation (21st November, 2013)||Current Price (02nd March, 2015)||Upside|
|Colgate||Rs. 1,252.65||Rs. 1,940.00||54.87%|
|ITC Limited||Rs. 312.65||Rs. 356.15||14.10%|
|Bharat Electronics||Rs. 1,062.35||Rs. 3,675.25||245.95%|
|Hexaware Technologies||Rs. 119.65||Rs. 265.80||122.15%|
|Hind Rectifiers||Rs. 37.05||Rs. 89.60||141.84%|
How many Stocks should you own?
Warren Buffet has over 50!
Our own Rakesh Jhunjhunwala has about 30.
Warren Buffet has over 50 stocks in his portfolio. He also said this- “Diversification may preserve wealth, but concentration builds wealth”
— Rajat Sharma (@SanaSecurities) March 1, 2015
|Company||Rs. In Cr.||% of portfolio|
|TV 18 Broadcast||56||1.26%|
|Pipavav Defence and offshore||48||1.08%|
|Geojit BNP Paribas Financial||36||0.81%|
|Sterling Holiday Resorts||20||0.45%|
|A2Z Maintenance and Engineering||16||0.36%|
|Hindustan Oil Exploration Company||8||0.18%|
|McNally Bharat Engineering||6||0.14%|
|Prozone Capital Shopping Centres||6||0.14%|
|Adinath Exim Resources||0||0.00%|
Before you think of imitating Buffet of Jhunjhunwala, understand that their goals may be very different from yours. Some of the stocks they have in their portfolios have been there for many years and are most likely to be there for many more years.
Often their holdings are strategic stakes and zero cost investments which pay handsome dividends.
About Zero cost investments
This is when you have earned more from a stock investment than what you paid to acquire the stock. Also read:
In the portfolio of some ace investors you will find stocks which they hope will generate multibagger returns in future. As an investor just starting out, you should notice how much money is allocated to such stocks. By any stretch I don’t think it will be more than 20-25%.
As a young investor who is starting out in stocks, hold no more than 5 stocks. Of course, the size of your portfolio will keep increasing as more and more of your stocks fall below zero cost.
As you (and your investments) mature, the complexion of your portfolio changes, that is if your initial investments were wise. I have heard stories of investors starting out with speculation and trading and at a certain point they become long term investors. This may well be because of the belief which many have that a few thousand rupees is not sufficient for starting out as a stock investor. There is merit in this belief.
How much money is enough to hold 5 stocks?
Rs. 8, 50,000/-
Given where markets are today, I think Rs. 8.5 lacs is more than a good amount to get close to Rs. 1 Cr. over a 12-15 year period. Provided that you keep reinvesting all dividends and do not get tempted to trade or get into quick rich stocks.
Yes. I am positive.
How do you get the first 8.5 lacs?
Save, earn, ask your parents, friends, girlfriends or boyfriends, do what it takes but do not start with loans. You are unlikely to make more than 12% a year (your interest cost).
Even with a few thousand rupees you can make a good long term investment portfolio, which will be far less risky than speculative trading.
This will depend on many factors like investor’s investment horizon, risk appetite, time you can spent in tracking/researching the stocks – their performance, market news in context of the stocks.
Diversification – the practice of holding a wide variety of investments within a portfolio, spanning market caps and sectors to reduce the overall volatility of portfolio.
I firmly believe that if you are wrong about 5, you will be most likely wrong about 50.
For sure you should diversify your investments but diversification should not mean buying more stocks. Rather diversify sectors. Choose likely winners from each sectors based on your risk appetite.
For a young investor, the idea behind diversification should be to minimize sectoral risk more than wealth preservation. Broad diversification will not work for you. Further, the more you diversify, the less you will know about your portfolio. Invest your money in just a few well researched stocks which you can follow closely. I have filtered down 8-12 stocks each based on market cap and investment risk. Subscribe here and work your way up to select stocks based on your own goals.
How Many Stocks Should You Own?
“The winning investor’s objective should be to have one or two big winners rather than dozens of very small profits.” – William J. O’Neil
Personally, I believe that an investor even with a very large sum of money should not own more than 6 or 7 well researched stocks. Keep it simple, keep it manageable.
About attractive opportunities: Be disciplined. When you have a portfolio of 5-7 stocks, it can get hard to not look at attractive opportunities beyond those stocks. Ideally you should sell your least attractive investment before you add even the most attractive of stocks to your portfolio. Similarly if you have Rs. 10,000 to Rs. 50,000 to invest, 3-4 stocks might be reasonably good.
For Who Dose This Approach Work Best
Of course this article is not meant for day traders (or for that matter for any trader). This approach will work best if you are able to spare that much cash for your portfolio. In my experience, if you are in a business or are employed and have a steady stream of income you are most likely to succeed with this. The only thing you need to do then is to follow industry developments, read a newspaper and keep yourself educated so you are able to change your stock allocations in case something drastic happens.
Rule: Don’t over-diversify. Concentrate on a small list of well-selected stocks, and hold on to them until the story completely plays out or until you end up holding them at zero cost.
Factors That Play an Important Role in Deciding the Number of Stocks
- What’s your risk appetite + the age rule.
Risk adverse investors would probably like to invest in a few more stocks to keep things diversified. The thumb rule here is this – “can you afford to suffer a loss with what you allocate to stocks?”
If you have made your money (in life) and have enough savings outside of the stocks then you can afford to be a little aggressive. It is the same if you want to make it big in stock markets and have clearly demarcated funds for stocks which you do not need in the medium to long term. If you don’t fall in either of these two categories, stick to PPF and high yield bonds and invest only a portion of your savings in high quality blue chips based on your age. Look at the age rule of stock investing on this page.
- How actively do you want to manage your portfolio?
If you want to be actively involved in the stock market then the number of stocks could be higher but in no event more than 9 stocks. Exclude zero cost/ long hold stocks. (by going through their annual reports, company conference calls etc). The idea is to have thorough knowledge of the company. On the other hand, if you don’t want to be active investors, focus on buying better and solid companies having good reputation and good history of performance.
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