A big question a lot of investors ask is how many stocks should you own?
That depends on two different goals:
1) Wealth Building – This is the mode where you are still building your wealth. If you are still working, then you are still in “wealth-building mode.” In this case, you should invest in individual stocks.
2) Wealth Protection – This is the mode where you are near or have achieved financial independence or retirement. You may have also sold a business, sold real estate, or inherited capital from a friend or family member. In this case, you should invest in a large number of stocks or consider investing in an index fund or ETF.
Wealth Building:
- Benjamin Graham recommends holding 10 – 30 stocks.
- Warren Buffett has stated that “Diversification makes very little sense for anyone who knows what they are doing. Diversification is a protection against ignorance. Investing in the entire market is fine if you don’t know how to analyze businesses. If you do know how to analyze businesses, it’s crazy to own 50, 40, or even 30 stocks.”
- Charlie Munger has stated that “Diversification can make sense for individuals who are just trying to hit the market average.”
- We recommend holding about 10 – 15 stocks which will allow you to build your wealth more efficiently.
CLICK HERE to view a video of Warren Buffett and Charlie Munger making comments on diversification.
Wealth Protection:
If you are in “wealth-production mode” then you may want to consider one of these strategies below.
Strategy 1: You may consider moving your funds to strong large-cap stocks that pay a dividend. The objective is to pay yourself the dividend so you don’t have to sell as many shares to pay for your lifestyle. If you hold individual stocks, you may want to also consider owning more than 15 stocks. This means your returns may not be as big but you’ll be a little more diversified.
Strategy 2: You may consider moving your funds to index funds or ETFs that pay a dividend. The objective is to pay yourself the dividend so you don’t have to sell as many shares to pay for expenses or hobbies. If you hold index funds or ETFs, you will see smaller gains and losses than you do with stocks.