A few weeks ago now, I went on the Twitter and asked my followers a simple question:
Do you think I’m sexy?
Wait. That’s not right. Besides, we all know the answer is yes. I’m sexy as all hell. Just call me Captain Sex Handsome, MD. Or Esq. Either or.
The other question I asked was how many stocks you guys think should be in a portfolio. The results I got were basically all over the map.
Robb from Boomer and Echo sent me two competing papers which said, respectively, that investors should have as many stocks as possible and 20-25. Robb himself tends to side with the second opinion.
JT, formerly of Money Mamba (where he still drops in from time to time), thinks the number should be somewhere between 6-12 names.
A reader on Twitter who is apparently nameless (can’t say I blame him), owns 41 different names, but admits he’s having trouble keeping track.
And finally, Liquid from Freedom Thirty Five Blog admits he holds 58 different securities, along with a bunch of other assets. That dude is all over the good debt thing, almost to the point where I’m concerned. But that’s neither here nor there.
We have answers from all over the map. Who’s right? Just how many stocks should you own, anyway? Essentially, there are two schools of thought.
1. Own as many as possible
This is your average couch potato investor. He thinks that it’s impossible to consistently beat the market, and that investors shouldn’t try. I’m sure he has a very average house with a very average looking wife. He’s a little overweight and has exactly 2.1 children. Geez, why do you have to be so average. Jerk.
I kid, of course. For a lot of you reading this, couch potato investing is the way to go. Just break down your investments into about 4 different ETFs, and keep plowing money into each. It’s easy to do this, just sign up for a Questrade account, where they let you buy ETFs for free. You’ll still have to pay to sell them (as little as $4.99), but they’re free to buy. It’s a great option for investors looking for simple portfolios with lots of diversification.
Of course, the ETF crowd has a point. By owning the whole market, you take away company specific risk (also known as operational risk). If you own 25 stocks and two are duds with inept management, that’ll drag on your returns. By owning individual stocks, investors take on both market risk and operational risk. More risk can be bad, especially during times of volatility.
2. The case for a concentrated portfolio
Meanwhile, in the other how many stocks should you hold corner, in the blue trunks, we have the concentrated portfolio folks!
Get a pen kids. That’s my worst joke ever. Write it down and hold it forever, preferably close to your heart. You’re not gonna want to let me forget that one.
The rationale behind a concentrated portfolio is pretty simple. If you’re spending the time researching and following the market, chances are you know a thing or two about it. So why dilute your best ideas? Find your top 10, or 20, or whatever number of stocks, and take a position in each. By putting more of your money in your best ideas, you’ll increase your chances of doing well, at least in theory.
Hell, I have a fund that has a stated goal of only having 10-12 positions in it. So far, I’ve got approximately 24% of the fund’s assets in 3 different stocks. You can probably see which side of the ledger I’m on.
But just how concentrated should a concentrated portfolio be? Am I the smart one by putting my money in just a few stocks, or are the folks who hold 20, or 30, or even 60 stocks the smarter ones? I can see the case for 20-25, but I think any more than that is too many. There’s one simple reason why.
Investors everywhere are plagued by not researching enough. We don’t bother to read annual reports. When a company comes out with earnings, the only time we notice is if the price moves a lot. I know a person who admits to following stock tips on Twitter without following through on research. Those are all bad things. I’m not saying you should research to the point of inaction, but at least crack open the latest annual report, and maybe the last couple quarterlies too.
If you own any more than 25 stocks, you simply don’t have enough time to keep abreast (heh) of what’s going on. Imagine reading 50 annual reports each year of just stocks you own? Add in the 30-40 I read each year for research purposes, and I wouldn’t have time for a damn thing. You guys would go without my witty Uproar-isms, possibly leading to greater productivity and people seeing the sun more. This cannot happen.
So, how many stocks should you own? I like the concentrated portfolio, and will end up having 10-15 names in the Uproar Fund. I’m even okay with 20-25. But any more than that? I can’t approve. You just don’t have the time to properly stay informed. And if you aren’t informed, you’re a lousy investor.