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How many different stocks should a individual investor hold?

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Money Talk > Investing, Stocks and Bonds

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coaster
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quote:
Originally posted by Series7ExamTutor
Mutual funds have failed miserably in their attempts to outperform markets so why should the average investor think he or she would achieve better results than a portfolio manager who has special training.

I explained above why mutual funds fail, and why that failure has little to do with stock selection. Stock selection isn't that hard; you don't need special training; anybody can do it. An index is an average; a stock index is an average that's made up of a set of stocks of companies that are above average and a set stocks of companies that are below average. If a stock tracks the success of the company over the long term (and yes, it does), all you have to do is to avoid picking the companies that are below the average. And that's not hard to do because above average companies tend to persist in their above average performance and below average companies tend to persist in their below average performance. Just pick the good companies and pay attention.

Saying that average investors shouldn't invest in individual stocks because they can't do it; aren't qualified to do it; and are doomed to fail is doing them a huge disservice. I won't dispute that index funds are better suited for most investors, but it's not because they can't, it's because they won't. And so, for people like the young investor who's the OP of this thread, there's no way I'm going to discourage them by telling them to forget the stocks and put their money in an index fund; in fact, I'm going to be here tooting horns, waving flags, and doing sommersaults to cheer them on, because I know if they stick with it and do it the right way, they're going to end up with a portfolio worth a whole lot more than if they'd taken the advice of those who tell them that no, they can't do that.

~Tim~
Post Sat May 25, 2013 4:56 am
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blixet
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Re: How many different stocks should a individual investor h  Reply with quote  

quote:
Originally posted by Guppy2
Hi I have read that the best number of stocks to hold is between 5-7.


Hi Guppy2. I'm wondering where you have read this? That would be a really concentrated portfolio with a lot of idiosyncratic (company specific) risk. In general, the rule is you don't get any additional expected return for holding idiosyncratic or non-systemic risk. Not to say you couldn't hit it out of the park, but it'd probably be with more than a little bit of incredible luck.

If you really worked at your analysis and were very good at it, a 10-15 stock portfolio is not unheard of. It used to be thought that it took 20-25 to diversify away most of the non-systemic risk. Now the current research pegs it at closer to 60.

For all the work involved in stock picking and monitoring, 10-15 stocks seems manageable, but still quite risky. Personally, I don't hold individual stocks anymore.

Good luck with your stock investing!

Information is more valuable sold than used ‚Äď Fischer Black
Post Sat May 25, 2013 5:46 pm
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Folio Explorer
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I read somewhere that 20+ diversified stocks can approach the diversification advantage of a mutual fund.
Post Sun May 26, 2013 10:05 pm
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iassetmanager.com
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20 to 30 stocks is all you need. But if you want to own less than 10 stocks you should consider building your portfolio from ETFs. [/i]
Post Sun Jun 16, 2013 9:22 am
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Radix3d
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quote:
Originally posted by oldguy
quote:
Only about 15% of the fund managers beat the SP500 index - and it's not even the same 15% every year.





Could you provide sources? Lipper and the Vanguard Group did a study over 20 years and professional funds beat the SP500 consistently 32% of the time. Which is hardly ideal, but you have to understand most of these funds can't invest in micro caps and small caps where the true value opportunities are. Warren Buffett's returns were around 50% annually when he started out, but now he has so much money he can't even seem to even beat the SP500 some years.

If you are trying to beat the SP500 I recommend no more than 5 stocks in your portfolio. That is primarily how Phillip Fisher and Warren Buffett made such huge returns. The average investor isn't trying to beat the SP500, however. Personally I think an Index fund or ETF is appropriate for the average investors. I think it's a waste of time to have 20 stocks in your portfolio because it is very unlikely most people will beat the SP500 that way, and you will just rack up taxes and broker fees.
Post Sun Jun 16, 2013 9:01 pm
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oldguy
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quote:
Could you provide sources? Lipper and the Vanguard Group did a study over 20 years and professional funds beat the SP500 consistently 32% of the time.


Here's one site - but I've seen that statistic repeated manay places over the years. But qualifiers are needed - how many beat it each year, how many beat it over 5 years, 10 years, how many over 20 yrs, how many over 30 yrs, etc. During the market 'lost decade', 2000 to 2010, the brokers could often beat the SP500 Index simply by dropping abut 100 losers and owning the 400 best - but that begs the question - when do I quit? The market turn and run-up of 2009/2010 would have reversed their fortunes.
As for the 32% winners over a 20 year study - all that means to me is that about 70% fail, even over the longterm. Very Happy
Post Sun Jun 16, 2013 11:49 pm
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coaster
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quote:
Originally posted by Radix3d
I think it's a waste of time to have 20 stocks in your portfolio because it is very unlikely most people will beat the SP500 that way, and you will just rack up taxes and broker fees.


More stocks in portfolio: the probability you will beat the market goes down; the probability you will not underperform the market also goes down.

Fewer stocks in portfolio: the probability you will beat the market goes up; the probability you will grossly underperform the market also goes up.

I don't have any data, handy, though I've read the analysis many years ago; but just to illustrate what I'm saying: (and this is entirely hypothetical, invented numbers solely to illustrate the point)

30 stocks in portfolio probabilities:
- beat the market: 15%
- lose more than the market: 15%

5 stocks in portfolio probabilities:
- beat the market: 35%
- lose more than the market: 35%

In other words, holding fewer stocks may increase the odds you can outperform the market, but it also increases the odds you'll lose more than the market.

There is a "sweet spot"; I don't know exactly where that is....it probably varies. But I'd suspect around 10 - 15 stocks. 20 is definitely too many to keep track of unless you've got a lot of time to spare.

Taxes is definitely an issue; broker fees is not (at least if you're using an online discount broker).

~Tim~
Post Mon Jun 17, 2013 5:24 am
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Anton Martin
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Re: How many different stocks should a individual investor h  Reply with quote  

quote:
Originally posted by Guppy2
Hi I have read that the best number of stocks to hold is between 5-7. Is there a number range I should follow? Currently I have invested in 9 different companies and I plan to invest More into the stock market. I have never reinvest into the same company before, maybe I should start doing that. currently I am looking to put more funds into my account.


Like "coaster" said, put that much money into stocks that much you afford to keep and just keep your own method of investing apply to you don't refer to anybody's it varies from person to person and depends on individual financial portfolio.

Good Luck......
Post Mon Jun 17, 2013 10:16 am
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Radix3d
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quote:
Originally posted by coaster
quote:
Originally posted by Radix3d
I think it's a waste of time to have 20 stocks in your portfolio because it is very unlikely most people will beat the SP500 that way, and you will just rack up taxes and broker fees.


More stocks in portfolio: the probability you will beat the market goes down; the probability you will not underperform the market also goes down.

Fewer stocks in portfolio: the probability you will beat the market goes up; the probability you will grossly underperform the market also goes up.

I don't have any data, handy, though I've read the analysis many years ago; but just to illustrate what I'm saying: (and this is entirely hypothetical, invented numbers solely to illustrate the point)

30 stocks in portfolio probabilities:
- beat the market: 15%
- lose more than the market: 15%

5 stocks in portfolio probabilities:
- beat the market: 35%
- lose more than the market: 35%

In other words, holding fewer stocks may increase the odds you can outperform the market, but it also increases the odds you'll lose more than the market.

There is a "sweet spot"; I don't know exactly where that is....it probably varies. But I'd suspect around 10 - 15 stocks. 20 is definitely too many to keep track of unless you've got a lot of time to spare.

Taxes is definitely an issue; broker fees is not (at least if you're using an online discount broker).


Only holds true if we are throwing darts or if markets are efficient enough to turn investment decisions into pure guesses. In either case you're still better off in an index than 20 stocks.

We are talking about above average investors who are trying to beat the market average, not your average investor. If you are an above average investor and you have 20 stocks, can you rank number 1 as well as you rank number 20? Can you know it as well? No, you cannot.
Post Mon Jun 17, 2013 10:44 pm
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coaster
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quote:
Originally posted by Radix3d
you have 20 stocks, can you rank number 1 as well as you rank number 20? Can you know it as well? No, you cannot.


No, of course not.

From one of my posts in this thread on the preceding page:

quote:
In a typical portfolio of ten stocks you'll have three losers, three winners, and four ho-hums. You just have to keep trying until you get those three winners. Those three winners drive your entire portfolio return plus pay for the losers.


I don't get too wrapped up in what an individual stock does so long as it continues to meet my original reasons for buying it, and doesn't meet my usual reasons for selling it. The main thing is the performance of the entire portfolio, not the individual stock. You can't tell ahead of time which of those ten are going to be the three winners. If I made a good choice, they end up telling me; if I made a bad choice, then they also end up telling me. As I look back on my buys and sells over the years I find that the biggest, most frequent, and most consistent mistake I've made is *not* picking a bad stock, it's been selling a good stock too soon.

BTW, regarding throwing darts, you're aware of the various studies done showing that picking stocks by throwing darts produces better results than the index? Here's one where they had monkeys throw the darts:

http://www.forbes.com/sites/rickferri/2012/12/20/any-monkey-can-beat-the-market/

Personally, I think even the dart-throwing can be improved upon if one just winnows the selection set a bit first....

~Tim~
Post Tue Jun 18, 2013 4:52 am
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Radix3d
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quote:
Originally posted by coaster

BTW, regarding throwing darts, you're aware of the various studies done showing that picking stocks by throwing darts produces better results than the index? Here's one where they had monkeys throw the darts:



No, and I don't believe it either: "Since small companies outperformed big companies, this is how Malkielís monkey portfolio beats the market." So in other words they are picking an index that is weighed heavily in larger companies, and comparing it to randomly selected stocks with lower market caps. Not impressive and it's a useless study.

It also neglects mentioning broker fees and taxes. Due to economies of scale the index will likely be cheaper and therefore offer a higher return.

I restate my original claim:
Amateur investor -> Index/ETF
Skilled investor -> low diversity
Post Fri Jun 21, 2013 3:18 am
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coaster
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OK, it's a claim. You're entitled to make any claim you wish. Now support it. I haven't seen you do that yet. I'm interested in your reasoning and your data. I'm all eyes and ears. Smile

~Tim~
Post Fri Jun 21, 2013 4:29 am
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Foreign institutional investors (FIIs) bought Rs 5.62 billion (USD 95.64 million) worth of stock futures. FIIs would have bought Reliance Communication for sure, as it added 2.5 million shares in open interest across futures, which signifies the counter may move higher. Laughing [/url]
Post Fri Jun 21, 2013 5:23 am
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Two thoughts: 1) I think more than 5-7 stocks are needed for diversification. 2) The virtue of individual stocks is an expense ratio of exactly 0, and this is often overlooked by mutual fund and ETF advocates. Good luck!
Post Tue Jun 25, 2013 1:39 am
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