How many stocks should you have in your portfolio?

The key to investing is to make a balance between the risk and the return. And it can be summarized in a word: “Diversification”.
#investingkasearchengine #investing

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Diversification
It is the art of spreading your investment in various categories of Assets, which helps earn the desired returns without putting your portfolio at high risk.

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How much diversification is enough?

In investing you have heard that “Don’t put all of your eggs in one basket”.

Diversification is not rocket science. It is simple but not that easy

Let’s understand about “Excess diversification” and “less diversification”

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Excess Diversification

You already know excess of anything causes more harm than good.

Diversification of portfolio indeed helps you in reducing the risk but It can also give losses. The loss incurred by one stock can be set off by the gains in other stocks.

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Example

Suppose you have invested Rs 100k in the stock market. And you have invested Rs 2k in 50 stocks.

If one of your stocks doubles itself, you will feel glad. But you will get back to reality when you realize that the overall increase in the portfolio was a mere 2%

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Less Diversification

Although over-diversification is harmful, excess concentration of #portfolio is no good as well. The concentration will increase the risk of your portfolio. If one stock doesn't perform, the possibility of getting high returns will fade away

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How to build an ideal equity portfolio?

Invest in 15-20 stocks

4-5 stocks in the portfolio will increase the risk. At the same time, 40-50 stocks will decrease the probability of desired returns. So 15-20 stocks are the ideal diversification mix

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Don’t invest more than 8% in one stock

If you invest 30-40% of your capital in one stock then it is not a diversification anymore. So, it’s advisable not to invest more than 8% of the total portfolio in one company

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Don’t invest more than 25% in one sector

One unfavorable event may eat away all the returns if you have focussed too much on a sector. Therefore, you should add an ideal number of 5-6 sectors in your portfolio with not more than 25% investment in a specific sector

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Investing in other instruments

An ideal investment portfolio isn’t made entirely from equity. To maintain balance you should also invest in other asset classes like Gold, Bonds

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The bottom line

If you have read the thread carefully. You would have realized diversification is not that easy but simple.

In the end, remember that these are just standard recommendations and may not exactly be the same for all.

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Let us know how many stocks you have in your portfolio?

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