How Many Stocks Do You Need?

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Diversified PortfolioHi All,

Most financial advisers say you need a diversified portfolio of stocks to get the most for your money. However, they rarely tell you how many stocks you need before your risk is optimally spread around. Well, the sweet spot appears to be owning between 10 – 30 separate individual stocks.

How Many Stocks Is Enough?

In his 1930s classic, The Intelligent Investor, Benjamin Graham said that the magic number was somewhere between 10 and 30 issues. In 1968, John Evans and Stephen Archer concluded that 10 stocks were enough. And in the 1970s, Burton Malkiel said 20 stocks will do in his book A Random Walk Down Wall Street. Other more recent studies have shown that the benefits of diversification tend to decline after 30 stocks. So, the sum total of about 70 years of research indicates you need between 10 and 30 separate individual stocks.

Diversify Across Market Sectors

Being adequately diversified is more than just the number of stocks in one’s portfolio. To be properly diversified, you need exposure to the entire market and its known components. This typically means spreading your assets around so you have some exposure to the following market components:

1. Market capitalization (Dollar value of shares outstanding)
2. Domestic stocks (U.S. Equities)
3. Foreign stocks (Non U.S. Equities)
4. Value vs. growth (Low price vs. high growth in profits)

Typically you would also want to spread your stocks among the following economic sectors:

1. Telecom Services
2. Utilities
3. Energy
4. Consumer Staples
5. Health Care
6. Materials
7. Information Technology
8. Financials
9. Consumer Discretionary
10. Industrials

For more on managing your portfolio, check out our postings on:

Modern Portfolio Theory
Key Market Indexes
Bond Basics
A Crash Course On Bonds

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