Hey Bow Tie Nation, Joseph Hogue here and answering a question Wall Street doesn’t even want you asking…how many stocks should you own?
Not knowing the answer keeps you dependent on the so-called experts for stock ideas and advice but the truth will truly set you free!
Not only will you see that you don’t need to pay the advisor fees and commissions but you’ll be set free to make your own investing decisions.
See if this sounds familiar. You’ve just turned on CNBC or clicked through to YouTube for your daily feast of stock picks. You chow down on a buffet of ideas; five, ten even 20 stock picks in an hour.
You’ve heard the expression, biting off more than you can chew…well investing in more than 20 stocks is like trying to stuff an entire double quarter pounder with cheese in your mouth…all at once!
All you get is your third double-bypass and the creeping sense that things are getting a little out of control!
And that is EXACTLY what Wall Street WANTS!
Because Nation, investing has become an entertainment industry! Investing is no longer about making you money. It’s about keeping you entertained.
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Everyone from TV to online and even here on YouTube, they make their money on ad dollars which means they need you addicted to stock picking. Like the junkie in need of a fix, they need you coming back for that next hot stock. They do this by confusing you with as much conflicting information as possible, keeping you scared and dependent on that information.
But it wasn’t always like this. Research by Bloom and Crocket in the early seventies found that a third of investors held just one stocks and half had two or fewer in their portfolios.
I’ll reveal how many stocks the average investor now holds but I want to get your opinion on this. How many individual stocks do you own in your portfolio, so not including ETFs, and do you feel like you’re able to keep up with each? Scroll down and let me know in the comments, how many stocks do you feel is too many?
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How many stocks does the average investor holds?
More recent research from the Federal Reserve shows that the average investor now holds upwards of 30 stocks in their portfolio. Worse still is data from the New York Stock Exchange shows investors are trading in and out of their stocks like never before. This shows the average holding period for stocks, as high as eight years back in the 60s and until 1980…investors held on to their stocks for four years on average. That is long-term investing, giving stocks time to grow and even though most investors still say they invest long-term…that number is now five and a half months. Investors are now holding their stocks for less than half a year.
The problem with that 180 degree shift is that holding 30 or 40 individual stocks means you’re probably not doing the research you need on any of them. You’re spending maybe an hour max to look at the company, half of which is spent online reading some ‘expert’s analysis’, and you’re definitely not able to keep up to date on the news and those earnings reports for every stock in your portfolio.
Wall Street has got us right where it wants us, flipping from one stock to another, salivating over the next hot stock tip and paying them for more!
Now, when we look at the actual research on how many stocks to own, and most of this is built around the idea of a minimum number of stocks that you need to be completely diversified. So the least number of stocks you should own in a portfolio so that your wealth doesn’t jump up and down too much from just one single company. The most famous of this research is by Evans and Archer published in the Journal of Finance in 1968. They found that you can get as diversification and spread that risk around in as few as 10 stocks. This graph shows the standard deviation, or a measure of portfolio risk on the left side…think of this as your freak-out measure because it’s how much your portfolio jumps up and down. On the bottom is the number of stocks in your portfolio, so obviously if you hold just one or two stocks then there’s a huge risk that your portfolio can crash with changes in either of those two stocks. That’s why this company risk part is so high on the left side of the chart.
As you start adding more stocks though, the risk that any one company can derail your portfolio gets smaller and smaller. Eventually, you’ve only got maybe five or ten percent of your money in any single stock and you only have that market risk. So what this is showing you is that no matter how many stocks you own, you’re always going to have a little market risk…if the market crashes it’s going to take everything down but you can reduce that company risk to almost nothing with as little as 10 to 20 stocks.
Nation, as much as I love to talk about stocks and we all want to find the next Apple or Amazon but honestly, most of the time it is just not worth it! You want to be enjoying your time with your family or friends. Not slumped over some cash flow statement trying to pick stocks. With 20 or 30 stocks considering you need to read through the earnings reports and financials every three months on each, it just is not realistic for the average investor.
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That’s why we talk about the core-satellite strategy here on the channel. This is where I invest in 10 to 15 individual stocks and then three to five funds. So with about sixty-five or 70% of my portfolio in those funds, that’s all the diversification I need. With just a few index funds, I get exposure to hundreds of stocks, bonds and real estate companies so I’m covered on every part of the economy.
If you need ideas on which index funds to buy, we recently looked at the five most popular index funds and the only one you need for your portfolio so look for that video linked below!
Now with the remaining 30% that I have in those 10 to 15 stock picks, I get the opportunity for those higher returns. I’ve got maybe 3% of my money in each. So I’m not overly exposed to problems at any one company, but I still have a chance to pick some strong stocks that are going to do well.
That last part is very important. So I want to repeat it. You should never have more than 5% of your money in any single stock.
The problem here is that investors just get too excited about a stock. They put a bunch of money into it and maybe the shares fall a little bit so the investor buys more shares in that dollar cost averaging strategy. They keep adding more shares and pretty soon you’ve got one stock that is 20 or 30% of your portfolio.
Nation, you cannot get emotional about your stocks. You can like a company. You can think it sells great products and has a strong future but the second you get emotional about it…well, they say love is blind and that will lose you money in stocks. You become blind to the other side of the story, the news that might tip you off that the company is in trouble or the developing trends that could mean a lost advantage over its competitors.
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What happens if that company bankrupts? Even if it doesn’t though, where is your portfolio going if that stock is just dead money for years? You have got to keep a limit on the amount you have in any one single stock. I like to keep mine at no higher than 5% of my portfolio. You might decide a little higher, a little lower, but I’d keep it right around that area for that protection.
And that core-satellite strategy works perfectly here on so many levels. Because you’ve only got 30% or so of your money in individual stocks, you don’t need to be chasing that next hot stock idea. With three percent of your money in each, that’s only 10 stocks you need to research and keep up with.
With this strategy, you also know you won’t destroy your portfolio with any single stock. You’ve only got 30% of your money in a handful of stocks so that’s three- or five-percent in each at the most. You can still dollar cost average, investing more in each stock, but over time as you invest regularly. That’s going to grow your portfolio and you won’t have to worry about timing the market.
Because it’s a limited number of stocks, you’re also limited to only the very best like the ones we’re highlighting in our Just One Stock series. We’re covering the very best stocks in each of nine topics, perfect for that 10-stock portfolio so look for the links to those videos in the description.
Check Out the Entire Just One Stock Series
If You Invest in ONE Bond ETF, Make it This OneIf You Invest in ONE Growth Stock, Make it This OneIf You Invest in ONE Value Stock, Make it This OneIf You Invest in ONE Index Fund, Make it This OneIf You Invest in ONE Dividend REIT Stock, Make it This One