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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