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Is there a certain number of stock positions that one should keep in a portfolio? For example what makes more sense ?

Option 1: $10,000 spread among 5 solid stocks, if you find new stock then remove 1 weak stock from those 5 and add new. Never have more then 5 positions.

Option 2: $10,000 spread among few good stocks. Keep adding position more or less as you find individual stocks performing better.

Ved

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The two biggest issues that impact your question I would say are diversification and fees.

If you have $10,000 to invest and only invest it in two securities, then a 20% drop in one security can have you lose 10% of your initial investment which I would consider a very high risk scenario.

If you have $10,000 to invest and invest it in 20 securities, then a 20% drop in one security would only cause you to lose 1% of your initial investment. So far this is looking better from a diversification point of view.

But then the issue of fees comes in. If you paid $10 per trade to buy those 20 securities you already spent 2% of your initial investment in fees! Not to mention you will pay at least another $200 to get out of all those positions.

No right answer - but those are the two factors I always try to balance.

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    One way of increasing diversification is to buy shares in a stock mutual fund instead of buying individual stocks. In many cases (no-load funds), there is no charge for buying or selling shares in the mutual fund, but the mutual fund charges a fee, ranging from a fraction of 1% to more than 2% (per annum) of the assets. Some people find this objectionable, others prefer to rely on their own stock-picking capabilities than that of the mutual fund manager, in some countries, mutual funds are not easily available or are poorly run or regulated, etc. – Dilip Sarwate Aug 3 '12 at 13:36
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    Note that some broad general-purpose S&P500 mutual funds and exchange-traded funds have expense ratios the likes of 0.06%. These funds typically are passive, tracking an index instead of relying on the manager to select individual stocks for investment. The returns from these vehicles will never be spectacular relative to the rest of the stock market, but they generally won't lag behind, either. – user296 Aug 4 '12 at 0:52
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I would just buy one ETF (index-fund) on the market you think will perform better. It will take care to buy the 5 most solid stock in this market and many other more to reduce the risk to the bear minimum. You will also spend only few bucks in comissions, definitely less than what you would spend buying multiple stocks (even just 5).

It's hard enough to forecast which market will perform better, it's even harder to do stock picking unless you have the time and the knowledge to read into companies' balance sheets/economic incomes/budgets/market visions etc.

And even if you are great in reading into companies balance sheets/economic incomes/budgets, the stock market usually behaves like a cows' drove, therefor even if you choosed the most valuable solid stocks, be prepared to see them run down even a 50% when all the market runs down a 50%.

During the 2008 crisis the Europe market has lost a 70%, and even the most solid sectors/stocks like "Healthcare" and "Food & Beverage" lost a painful 40% to 50% (true that now these sectors recovered greatly compared to the rest of the market, but they still run down like cows during the crisis, and if you holded them you would have suffered a huge pain/stress).

But obviously there's always some profet/wizard which will later tell you he was able to select the only 5 stocks among thousands that performed well.

  • humm...so you are suggesting to find ETF which already hold few position that I like and then go from there...u surly have good point..I dont have much exposure to ETFs... – Ved Aug 17 '12 at 19:23
  • @Ved: I'm suggesting to just buy a one single ETF (i.e. an ETF on the Europe market like Lyxor ETF EURO STOXX 50 lyxoretf.co.uk/homeukpro0/products/country/UK/product/…), instead of buying 5 stocks unless you really know what you are doing (i.e. you read hundreds of balance sheets and economic incomes of companies that belong to the European index and select the 5 most valuable). Don't forget that many ETF even distributes the dividend accrued from the stocks they hold. – Marco Demaio Aug 18 '12 at 14:46
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There is no ideal number of stocks you should own. There are several factors you should consider though.

First, how actively do you want to manage your portfolio. If you want to be very active then the number of stocks you own should be based on the amount of time you have to research the company, by reading SEC filings and listening to conference calls, so you are not surprised when the company reports every quarter. If you don't want to be very active, then you are better off buying solid companies that have a good reputation and good history of performance.

Second, you should decide how much risk you are willing to take. If you have $10,000 that you can afford to lose, then you can put your money into more risky stocks or into fewer stocks, which could potentially have a higher return. If you want your $10,000 grow (or lose) with the market, better off, again, going with the good rep and history stocks or a variety of stocks.

Third, this goes along with your risk to some extent, but you should consider if you are looking for short term or long term gains? If you are looking to put your money in the market for the short term, you will probably be looking at fewer stocks with more money in each. If you are looking for long term, you will be around 5 stocks that you swap as they reach goals you set out for each stock.

In my opinion, and I am not a financial expert, I like to stay at around 5 companies, mostly for the fact that it is about the ideal number of companies to keep track of.

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    Ah that is a good answer, this is what I had in mind but could not explain it in the question. So basically the struggle is to find time to research all these companies. I dont like the idea of just buying something because it was recommended by someone. What I need to figure out is how many company I can personally handle and keep track of. Thanks for the tip. – Ved Aug 3 '12 at 16:49
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Honestly? The maximum number really doesn't matter. If you're investing long-term, you buy in when it looks like an OK deal (still undervalued but looks like it'll grow), and you sell when it looks like the stock has reached a peak it won't reach again for a while if ever. However many stocks you can keep track of on those kinds of terms is how many stocks should be in your portfolio.

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Hi if your doing swing trading or any kind of trading and you have only $10,000 divide that capital into 4 or 5 positions other wise you pay too many trading fees. Now if your doing long term investing then you could divide that $10,000 into 10 positions and trading fees will barely affect you or you could still do 5 positions. But generally speaking if I hade $100,000 and I was doing long term or short term I would divide that into 8 to 10 positions. Say if I hade $1,000,000 I would divide my capital into 18 to 25 positions. But dividing $10,000 into 10 positions would be great money management and your risk will be way less. For me I would divide it into 5 positions because it's such a small capital that's just what I would do because I like risk too much to divide that small capital into 10 positions for long term or short term. The more positions you have the less risk the less positions you have the more risk. So if you like risk stick with 5 positions for both short term trading and long term investing. Jim Cramar always says divide your capital into 5 positions and this advise from him is directed at those with a small capital like yours.

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