Investing in stocks is a great way to grow wealth over time. Over the past 50 years, the stock market, as measured by the S&P 500, has rewarded long-term investors with an average annual 10% return (before inflation). So if you load your brokerage account with an S&P 500 index fund or similar investments, there's a chance that you, too, could snag a similar return over time.
Now, you'll often hear that it's really important to diversify your portfolio rather than invest in just a handful of stocks, or stocks within the same specific industry. But taking the concept of diversification to an extreme by holding hundreds of stocks isn't a good idea.
It's all about moderation
The logic behind diversification is simple. You want a nice array of stocks in your portfolio so that if a few companies you own falter, you have other investments that can pick up the slack.
Similarly, it may be that a particular segment of the market experiences its share of turbulence, such as the tech sector, which took a big hit in 2022. If you make a point to load your portfolio with stocks across a range of market sectors, you'll have more protection when one sector takes a beating.
But while it's definitely a good idea to own a few dozen stocks, you don't want to load up on too many. Stocks aren't an investment to set and forget. It's important to keep tabs on the companies you're invested in. And that's a hard thing to do 80 or 100 times over.
If you buy too many stocks, you might have a difficult time keeping up with all of them. That could put you at risk of hanging onto stocks you should really be considering dumping due to issues with the companies behind them.
What's the ideal number of stocks to aim for?
There's no single number of stocks that's optimal across the board, and a lot will depend on how much research you're willing to do. Remember, it's important to vet a stock before adding it to your portfolio. So if you're looking to build a collection of 45 stocks, you'll have to do research 45 times over.
For some context, the Motley Fool recommends owning at least 25 different stocks and says the average diversified portfolio contains between 20 and 30 stocks. You may decide that you'd like to own 36 different stocks, and that's not unreasonable. But a portfolio of 75 different stocks may prove to be unmanageable for you.
Of course, there's another option to look at when it comes to building a diversified portfolio, and it's to add ETFs, or exchange-traded funds, into the mix. When you buy shares of an ETF, what you're doing is adding a bunch of different stocks to your portfolio with a single investment, thereby saving yourself some legwork.
You might, for example, buy into an energy ETF, and that could spare you from having to research dozens of energy companies individually to determine which stocks to buy. Adding ETFs to your portfolio is a good bet if you're not quite certain your holdings are diversified enough, but you already own a few dozen stocks and want to limit the number you put into your portfolio.
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FAQs
Over diversification is possible as some mutual funds have to own so many stocks (due to the large amount of cash they have) that it's difficult to outperform their benchmarks or indexes. Owning more stocks than necessary can take away the impact of large stock gains and limit your upside.
What happens when you buy a large amount of stock? ›
In the world of supply and demand, a 'large number of shares bought' would usually increase the price per share if it was at a 'market price'…that is the price would keep rising as buyer kept trying to buy more shares.
What happens when you buy more shares? ›
Share dilution occurs because the additional shares reduce the value of the existing shares for investors.
What is the danger of issuing too much stock? ›
When a company issues additional shares of stock, it can reduce the value of existing investors' shares and their proportional ownership of the company. This common problem is called dilution.
Is 100% stocks a bad idea? ›
The research by three U.S. finance professors led by University of Arizona professor Scott Cederberg comes to the surprising conclusion that a portfolio holding 100% stocks and no bonds is best, even for people already in retirement.
Is it bad to invest in a lot of stocks? ›
move 80% of your portfolio to stocks and 20% to cash and bonds. If you wish moderate growth, keep 60% of your portfolio in stocks and 40% in cash and bonds. Finally, adopt a conservative approach, and if you want to preserve your capital rather than earn higher returns, then invest no more than 50% in stocks.
What happens if there is too much stock? ›
Reduced Profits. The longer your inventory sits on the shelf, the more they lose value, and the more they cost you to hold. To move these products out of your inventory faster, you will have to sell them at a reduced price. You will earn a lower profit from these goods, and this will affect your balance sheet.
How much money can you make from stocks in a month? ›
Well, there is no limit to how much you can make from stocks in a month. The money you can make by trading can run into thousands, lakhs, or even higher. A few key things that intraday profits depend on: How much capital are you putting in the markets daily?
What are the disadvantages of too much stock? ›
Let's look at five key disadvantages of holding too much inventory:
- It's a waste of money and resources. ...
- It restricts your cash flow. ...
- Risk of stock obsolescence and spoilage. ...
- Missed opportunities. ...
- Decreased business agility.
You can withdraw the money you have invested in stock markets anytime as no rules are preventing you from it. However, there are fee, commissions and costs that you have to consider. When stock markets fall, investors feel comfortable withdrawing money and holding cash.
If the price of a stock goes down, and you believe it has long-term value as an investment, then a lower price is a good opportunity to buy. The key is to choose quality long-term investments, by learning how to find quality companies to invest in or simply buying into an investment fund, such as an ETF or mutual fund.
Can you sell a stock if there are no buyers? ›
Typically, this happens in thinly traded stocks on the pink sheets or over-the-counter bulletin board (OTCBB), not stocks on a major exchange like the New York Stock Exchange (NYSE). When there are no buyers, you can't sell your shares—you'll be stuck with them until there is some buying interest from other investors.
Is it bad to have too many stocks? ›
Can you over-diversify a portfolio? Yes. Holding 50 stocks rather than 25 may lower your downside risk somewhat, but it can also reduce your profit potential. And at that point, it may be better to consider investing through an index fund, or even a combination of several sector-based funds.
How much is too much in one stock? ›
There is no set definition for what makes a concentrated position. When an investment in a single stock represents more than 5% of a portfolio, T. Rowe Price advisors consider it to be worth addressing. Once a holding exceeds 10%, however, it represents a greater risk that requires more immediate planning.
How much of my net worth should be in one stock? ›
Numerous financial blogs and financial advisors will say that your position in company stock should be no more than 10-15% of your Net Worth.
Is it okay to buy 10 shares of stock? ›
Most experts tell beginners that if you're going to invest in individual stocks, you should ultimately try to have at least 10 to 15 different stocks in your portfolio to properly diversify your holdings.
Is 20 stocks too much? ›
It's a lot easier to track 15 to 20 high-quality stocks than a large basket of 50 to 100 stocks. It's true that you shouldn't put all your eggs in one basket. But that doesn't mean you should own all the eggs out there. Diversification is good, but too much of it can be bad.
Is 35 stocks too many for a portfolio? ›
Private investors with limited time may not want to have this many, but 25-35 stocks is a popular level for many successful investors (for example, Terry Smith) who run what are generally regarded as relatively high concentration portfolios. This bent towards a 30-odd stock portfolio has many proponents.
Is there a limit to how many stocks you can buy? ›
There is no universal limit on how many stocks an investor can purchase. However, companies may have rules in place that prevent traders from buying up a large number of shares. With all that in mind, you can buy as many shares as your budget allows. Be aware that there may be fees associated with your stock purchases.
