Is there a magic number of stocks to hold in a portfolio?




This is one of the first questions that a serious investor should ask himself. And this time, there is a concrete answer. In fact, what everyone can agree on is that every investor’s portfolio should have some degree of diversification. In other words, no one should hold only one or two stocks. To reach diversification you should own at least around 10 to 12 stocks. However you need to be careful because diversification is not necessarily obtained simply by owning 10 to 12 stocks. Why? Simply because stocks are sometimes (actually often would be more accurate) correlated, in other words their performances are kind of linked to each other. For instance, an investor in Vietnamese stocks can invest in PVD, PVS, PVT and PVE and thinks that he or she had reached some satisfactory level of diversification. However, these four stocks are part of the same group and PetroVietnam Drilling & Well Services JSC (PVD) and Petrovietnam Technical Services Corp (PVS) are also part of the exact same industry and sector. A portfolio diversification is about much more things than just owning a specific number of stocks. These stocks need to have low correlation between each other and in order to do that they need to be from different companies in different sectors and different industries. The ultimate goal of diversification is to yield high returns over the long-term while reducing the risk of losing money when compared with holding only one or few stocks. Owning a portfolio made up of only PVD, PVS, PVT and PVE could return you great returns over the long term, but there are ways to reach these same returns while reducing your risks.

Disclaimer:

 

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