A Practical Guide How Many Stocks Should Be In A Portfolio

There is no fixed answer to “how many stocks should be in a portfolio”, a portfolio well prepared can avoid huge losses and give good returns. Only proper math, art, and philosophy will help in arriving at an answer.  It is a very important question when investing in stock markets. In this article, you will benefit and understand how can you plan your portfolio better to get maximum returns.

Let’s say you want to invest INR 5 million in stock markets.

You will either invest in 10 stocks worth INR 5,00,000 each or 50 stocks worth INR 1,00,000 each!

how many stocks make a diversified portfolio

A balanced portfolio is always better than investing all funds in one company, which takes care of both associated risks and rewards.

“Don’t put all your eggs in one basket” is a very apt metaphor that suits here. It’s always better to diversify your portfolio. This is called the diversification of stocks.

Diversification brings the benefit of a steep rise in a few stocks and also helps in absorbing the shock of a fall in others. It’s also very important to take care to distribute the funds almost equally across the portfolio. The concentration of funds impartially is the key to a balanced portfolio.

how many stocks should I own with INR 5 million

Investment in no single stock should be so big that if it falls sharply, the entire portfolio suffers.

In the given example below, it makes it evident that huge funds invested in ABC Ltd. INR 40,00,000 in the hope of getting good returns, fell down to INR 3,00,000 within a year, which slapped the entire portfolio down to INR 13,00,000 from the original INR 50,00,000

Invested

After a year or more

Nor it should be so small, that even if it doubles or more, it doesn’t make much difference to the portfolio. In the given example below, it makes evident that even after identifying a particularly good stock, buying a very small quantity 1,00,000 shares @ 0.69, which rose almost 4 times in a year, is an opportunity lost, where your total fund value remains at INR 52,84,000 from the original INR 50,16,000, which had the potential to rise much higher.

Invested

After a year or more

Big Winners Strategy–

Typically, in a portfolio, there are few big winners that contribute to the bulk of the returns. The remaining stocks more or less neutralize each other and don’t contribute to portfolio return with some being up and some down. It is the pursuit of these few winners that contributes to the good returns of the portfolio.

Example- The concept of Big Winners is very much similar to the marks in school, which contribute majorly to the overall ranking. Subjects like Math & Sciences had the potential to score full 100 marks. But Language subjects like Hindi, English, and Marathi, where each paper was marked on various parameters like punctuation, grammar used, aesthetics, and vocabulary could maximum fetch from 70 to 90 marks. You got it right the Big Winners are Math & science, which contribute the maximum to the overall ranking. The remaining more or less neutralizes each other.

So, does the probability of finding these big winners increase in 10 stocks or in 50 stocks? Mathematically it doesn’t matter, if you identify 1 big winner in 10 stocks, you may identify 5 big winners in 50 stocks. Here is where investment philosophy comes in.

Big Winner in a block of 10 or 50 stocks

Invested

After a year or more

Now in the above example of subjects, one can prepare better with language subjects, and get its filters right by covering the entire portion or some important chapters based on past papers experience. A limited portion studied makes it easier to recall and implement. Everyone uses their own strategy to be able to answer 100% while in exams, and the final marks vary accordingly.

Philosophy of Investments

One needs to have a philosophy to invest. This philosophy can be anything- a low P/E ratio, or a great product, great earnings momentum, dividend yield, etc. This is typically what one calls a filter to select stocks amongst several stocks that are traded. If a stock fits your filter criteria, put it in your portfolio. So, if 10 stocks fit your criteria, buy 10 worth 0.5 million each. If 50 fit your criteria, buy all of them worth 0.1 million each.

The art or instinct is in refining your filter criteria to an extent where probably too many companies don’t pass your filter criteria and yet you are able to identify multi-baggers with tighter filters. A limited number of companies makes tracking them easier too and potential winners come out from a smaller pool of stocks.

Conclusion

There is no fixed number of stocks that makes a good portfolio. Think in terms of having a philosophy and filter criteria to identify stocks. Invest in all of these stocks in probably an equal amount each (balancing concentration and diversification). Over a period of time trying to improve upon your investment philosophy & filters will make you achieve great results.

Let me know in the comment section below, whether you have diversified your stocks.

When you are ready to invest, reach out to me at [email protected]

Cheers,
Fund Manager Akalp Gupta,

Founder StockInvest2Grow.com