Starting your portfolio with one stock or a few individual stocks is just the beginning. Ready to put in some effort with stock allocation? The next step is reaping the benefits of diversification — buying stocks from many different companies.
Portfolio diversification and purchasing new stocks from different industries sets you up for success, whereas purchasing one stock here and one stock there can lead to disaster. However, be careful not to over-diversify your portfolio, either — especially if you have a low-risk tolerance or a limited amount of money to invest.
There are so many tips and tricks that contradict each other! Finding the “perfect” balance is not easy, but it is possible.
There’s no ideal number of stocks or right portfolio size for the average investor. Some experts recommend 10 to 15 different stocks from different sectors as a rule of thumb; others say 20 to 30 is the right number.
It all depends on what you want to achieve, your risk profile, stock prices at the time, and what your financial goals are.
How Many Stocks Can You Own?
Before we dive into what you should own, let’s focus on what you can own.
Here are a few questions to ask yourself:
- Do you have the money ready and available to invest? If so, how much do you want to start with?
- Is diversification important to you, or do you prefer simpler investment decisions and fewer stocks? It’s not mandatory, but it is highly recommended.
- How do you want to invest? Do you plan to use a full-service broker or a robo-advisor? What are the estimated commission or brokerage fees?
- Are fractional shares an option to purchase?
Consider building a budget to help guide you through these questions. Don’t lunge into purchasing a stock without researching it and the company.
Is One Share of Stock Worthwhile?
Buying one share of stock is certainly okay, but weigh the outside factors first. For example, if your broker charges a commission on trades, it can add up quickly. This lowers the overall value of your investment.
Think of the consequences if you put all of your money into one stock. What happens if the company folds or the stock becomes worthless? All of your risks are associated with one stock.
Consider Fractional Shares
A fraction is a portion of a whole. Therefore, fractional shares represent a small slice of a company’s stock. Purchasing fractional shares is known as dollar-based investing.
Fractional shares were most common when stock splits occurred. Now, investors have the option to purchase them, too. Investors no longer have to worry about how much cash they have to buy stock in a company of interest.
You can compare fractional shares to a subscription-based investment. Investors with limited funds or those with pools of money can partake in owning fractional shares.
For example, the value of a share of stock costs $100, but you only have $10 to invest. You can still own the stock, represented as one-tenth of the share.
What Does It Mean To Be Diversified?
Diversification is one of the essential components of an investment portfolio. Think about it — too much of one thing could be bad; protect yourself and mitigate the risk.
There should be a balance in your portfolio so that when one stock is underperforming, another is overperforming. That is what you want to accomplish with diversification; keeping a variety of securities in your portfolio.
An assortment of stocks and other investments adds flavor to your portfolio. If one sector or industry receives a negative headline, causing a stock value to move downstream, another industry could move upstream to counterbalance it.
Is Risk Eliminated With Diversification?
There are two types of risks with investments:
- Systematic Risk: This is the market risk. Any change in economic conditions can affect assets causing their value to fluctuate. This includes changes in inflation rates, exchange rates, interest rates, or political uncertainty.
- Unsystematic Risk: This is the asset-specific risk. The company or government is the driver of change.
How Do You Build a Diversified Portfolio?
Building a diversified portfolio can reduce risk, especially during a financial crisis.
Start with your stocks first. If you’ve already made purchases, take a closer look at them and categorize them.
You should focus on keeping a variety of stocks from different:
- Industries: Choose between technology, transportation, commodities, and more.
- Market capitalizations: Large-cap, mid-cap, and small-cap stocks
- Styles (i.e., value vs. growth): Growth stocks are from reputable companies. Value stocks have higher returns and offer dividends.
- Other countries: Political events in the U.S., for example, may not have the same impact as those in foreign countries.
In addition to the number of stocks to own, consider other securities.
Raw materials and agricultural products are commodities that you can invest in. This includes oil, corn, silver, and gold.
When investing in commodities, you are buying into their future value. You can purchase them in the form of stocks, futures contracts, and physical assets.
The value of commodities rises and falls just as other investments can, but they provide comfort in long-term investment portfolios.
Here are some benefits of having commodities in your portfolio:
- Demand drives the price. Higher demand means higher value.
- Inflation affects the stock market, but not commodities, making them a hedge against inflation.
- Company performance affects the value of stocks. Products and materials do not have this volatility.
We are not suggesting that you change your career and begin flipping houses. If you are interested in purchasing physical real estate to rent monthly, enjoy your side hustle!
You can own real estate without maintaining a property by purchasing REITs (Real Estate Investment Trusts). REITs own income-producing commercial property, which is traded on the exchange and has a strong track record.
Instead of investing in a company’s assets, invest in its debt. By design, bonds provide a fixed income. The only downside is that they reduce your annual return on investment.
When entering into a bond, investors loan a company or government money. The interest earned on the money is paid to the investor, creating the fixed income.
Bonds on the market include:
- U.S. Treasury Bonds
- U.S. Savings Bonds
- Corporate Bonds
- Municipal Bonds
- Mortgage-backed Securities
Each bond will be unique. Some are issued by the federal government, others by cities or by corporations.
Exchange-Traded Funds and Mutual Funds
Exchange-traded funds (ETFs) and mutual funds contain a mixture of stocks and bonds. These funds are either passively or actively managed.
Familiarize yourself with these differences between EFTs and mutual funds:
- ETFs have a lower minimum investment than mutual funds. This is because ETFs are purchased at the market price. Mutual funds are based on the fund’s share price.
- ETFs are traded similarly to stocks. Investors have more control over the price of ETFs than they do over mutual funds.
- ETFs mirror index funds. Securities in a mutual fund change based on the selections of the portfolio manager.
What Are the Benefits of a Diversified Portfolio?
Over the last 100 years, there have been 18 economic recessions, with the last two happening within the past 20 years, according to Liberated Stock Trader.
Let’s look at it from another angle. Companies such as ExxonMobil, AT&T, and General Electric topped the charts on the stock market, labeled as the most valuable companies a few years back — then a financial crisis hit.
The value of these stocks began a downward spiral while those in the technology industry surged, including Apple, Amazon, and Google.
This is why it’s best to keep your portfolio diversified. Acting proactively, investors can mitigate unexpected risk, reducing the potential negative impact on their portfolio.
Summarized Tips for Investors
Diversifying your stock portfolio may feel overwhelming. Having more than one stock or investment is time-consuming but well worth it.
Here are a few tips as you build your portfolio:
- Don’t compare yourself to a mutual fund. Mutual funds can hold 60 or more stocks. Your goal in diversifying is not to hold the most shares but to add flavor to your portfolio.
- The size of a portfolio is not strictly based on the number of stocks owned. Instead, pay attention to the value of the shares.
- Focus on quality. People can be biased toward a specific company but should reach outside of their limits and research other sectors and industries.
- Understand the companies you own stock in. Learn what makes them tick.
The Bottom Line
There’s no clear-cut guideline for the exact number of shares or stocks an investor should own — nor is there one that predicts the future of the stock market or economy.
Investors have to use their best judgment and determine what is best for their investment strategy and financial needs.
Diversifying an investment portfolio is one strategy, using a variety of stocks and other investments to build a beautiful bouquet arrangement.
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Diversifying Your Portfolio | FINRA.org
60 Stock Market Statistics & Facts for 2020 | Lexington Law
Winners and losers in the longest US bull market ever | The Washington Post