So how many stocks should you keep in a stock portfolio? This is an interesting question. If you ask 10 different investors, you get 10 different answers. There are people who think that you cannot beat the marketplace, so you should just aim for wide diversification across the whole marketplace, and then there are people like Warren Buffett.
Warren Buffett famously said: diversification is protection against ignorance. It makes little sense if you know what you're doing. So what's the deal here? Well, obviously, there is no strict right or wrong answers to how many stocks you should hold in your stock portfolio.
It largely depends on your point of view and flowing on from that. It will largely depend on your investment strategy. For example, Warren Buffett is right. Diversification is protection against ignorance, but for a lot of people, the ignorant, widely diversified, passive, investing approach is the right strategy for them.
If you're someone that doesn't care about reading a balance sheet or a cash flow statement, or actually diving in-depth into the companies you invest in then diversification could very well be your savior, because there's.
A higher probability that one of your stocks will tank horribly just because you haven't done your due diligence, in which case you're, going to be mighty thankful that you have diversified your money across lots of different investments.
But remember there is an investing strategy where it's; okay, to be that ignorant investor. Of course, that is the passive investing strategy, that is, the dollar cost averaging strategy. In fact, with that strategy it's actually better.
If you can completely ignore all of the you know, stock marketplace hype or fear, and that's, a very legitimate investing strategy and in fact it's, one that Warren Buffett recommends for most people that don't want To go that extra mile, actually analyzing individual businesses, the best single thing you could have done on March 11th.
1942, when I bought my first dock, was just buy an index fund and and and never look at a headline, never think about stocks anymore. Just like it would do if you bought a farm, you just buy the formula put let the tenant farmer before you Anna, but it's.
Also, true that the. Why do you diversify the harder it's going to be for you to get considerable returns over time? And, of course, the reason for that is because your money is diversified, wider, okay, so it's, going to take more companies going up at a tremendous rate all at the same time just for your portfolio to perform really really well so buffets right.
When he says that diversification makes a little sense, if you know what you're doing, because of course, if you know what you're doing, you want to be concentrating your money into those companies that offer the best returns possible.
But, of course, that's, the catch is that you have to understand what you're doing. So that means that you have to thoroughly understand the business. You have to check that business for a competitive advantage and that competitive advantage needs to be backed up in the financial data.
You need to check over the management team. You need to make sure that their interests are aligned with the interests of the long-term shareholders. You need to check that they're running the company with skill and integrity and, arguably, most importantly, you need to make sure that you're only buying the shares of that company when the share price is below the intrinsic value right.
You need to make sure that you're, actually getting a good discount to intrinsic value, and this is the stuff that I teach over on profit 4. If you haven & # 39, t checked it out already introduction to stock analysis is where I talk about all of those steps in details so linked in the description.
If you wanted to check it out. So if you can go through those steps - and you know what you're doing - then obviously diversification makes little sense. Buffett is right because, overall, why would you want to put any money into the 10th best stock out there, when you can just put that money into the best stock that you've found or the second best stock or the third best stock? I mean if you look at Warren Buffett's portfolio.
Yes, technically he does own a lot of stocks. He owns fifty-two stocks in his portfolio, but if you actually looked deeper into his portfolio, his top 10 locations actually account for 82 percent of his portfolio and furthermore, his top five locations account for 67 percent of his portfolio.
So he is following his own advice and he isn't staying too diversified because he knows what he's doing so. Thus he's concentrated most of his money into 5 to 10, bigger locations anyway. With that said, how do I personally look at the topic of diversification? How many stocks do I look to hold in my portfolio? Well, firstly, I don't, really look at it.
That way. I don't think how many stocks do I want to own in my portfolio. I actually think what is the maximum percentage of my portfolio? I'd, be comfortable with just one stock taking up and for me.
Obviously, this is individual. It's up to you and what levels of risk you want to take on, but for me I would be comfortable. My upper limit would be about 20 percent. I certainly wouldn & # 39. T want to have my whole portfolio in one stock, but then again I wouldn't want my biggest location to only be say five percent of my portfolio.
So if I ran with the idea that I'd, only really feel comfortable with one company holding twenty percent of my portfolio, then naturally that leads me to have at least five stocks in my portfolio, and my reasoning, for that is this.
I've got to recognize that I'm, certainly no Warren Buffett. I can no Mohnish Pabrai. I'm, no Peter Lynch or Charlie Munger or Phil town or Ray Dalio. I'm, not one of those amazing investors right. I have to recognize that, even though I think I've made a hundred and ten percent in my stock portfolio in the last year, or so it was just a a very crazy return to have made over the space of 12 months.
I can't. I can't. Let myself get caught up into believing that I'm this. You know this hotshot invest or anything, because at the end of the day, no one is. If you're thinking that you're, some hotshot investor, then that is just a recipe for disaster, so I always pull myself back.
I want to hold probably at least five stocks in that portfolio, just to make sure that my portfolio isn't too heavily exposed to one that what happens with one individual company, because it's kind of just asking for it.
And remember: Warren Buffett's. First, rule of investing is don't lose money, so you want to avoid putting yourself in a location where the probability of that goes up, so that's. What I do with the active side of my portfolio, but I also hedge, my active portfolio with a passive portfolio.
This is another measure that I have put in place for myself, just to make sure that if something goes wrong, if I'm, actually not the best investor that I think I am then I & # 39. Ve still got this cushion of passive investments to fall back on so overall, I'm, always looking to have at least 30 % of my money held in just passive investments, investments that are widely diversified in their nature and they will just track the Market over time, and just slowly accumulate so overall that's.
How I personally approached the idea of diversification. I'm, not saying that everyone should approach it the same way that I do, but that's. How I approach it because, overall for me, I love looking into individual companies.
I absolutely love it. Okay, it's. I thoroughly enjoy myself when I'm researching into the the next potential stock opportunity right. I absolutely love doing that. So naturally, most of my money flows towards my active investing portfolio.
However, I've got to protect myself there, so I like to keep myself diversified within that active investing portfolio, and then, of course, I & # 39. Ve got my passive investing as a bit of a backup as a cushion just in case I don't turn out to be the world's, best investor that I just know.
I'm gonna be anyway before I left you guys there's, just one more point that I wanted to discuss when it comes to active, investing and diversification, and it's, important to remember that the critical first Step to active, investing looking at individual businesses is to always make sure that you fully understand your investment.
So you fully understand the investment that you've made the stuff that you've bought into right. So this is kind of this kind of conflicts with the idea of diversification, because if you are well diversified you own 10 to 20 different stocks, there's.
The problem here that how well do you actually know each one of those businesses? In my opinion, keeping track of any more than 10 stocks would probably equate to like a full-time job. So for me, while I think that diversification certainly does have its place our first step, our critical first step is to make sure that we understand every single investment that we make, and maybe that means that you only have five stocks in your active part of your Portfolio, maybe it means that you can go up to seven.
Maybe it means you & # 39. Ve got four okay, but I think more. What's more important than having huge diversification in an active portfolio is making sure that you thoroughly understand every company that is in an active portfolio.
So, yes, diversification is obviously very important, but make sure you don't push it so far that you've just got no idea. You actually hold in your portfolio anyway, guys that is my two cents on diversification.
I would love to hear how you guys go about diversification with your stock portfolios. Obviously, this is one where there's, not a specific right or wrong answer. So I'd, love to hear how you guys go about it.
Do you do something similar to me where you're, active and passive? What's, the largest percentage of your portfolio, that you would devote to one stock? I'd love to hear that drop that stuff down in the comment section.
Let's. Keep the discussion going leave a like on the video if you did enjoy it and, of course, check out profit for if you haven't done so already. If you're interested in either the passive investing strategy or the active, investing Warren Buffett style strategy - and you want a full walkthrough check out profitable links are in the description, but that'll.
Do me for today guys thanks very much for watching and I'll, see you all in the next video [ Music, ]