Investing in stocks can be a powerful way to grow wealth over time. When you buy a stock, you’re essentially buying a share in a company. This ownership allows you to benefit from the company’s success, whether it’s a well-known brand like Apple or an emerging business with potential for rapid growth.
Historically, the S&P 500 index, which includes stocks of many large U.S. companies, has averaged about 10% in annual returns, showing how long-term investing can support major financial goals like retirement, home ownership, and more.
If you’re thinking about investing in stocks, you might wonder: how many stocks should you actually hold?
Ready to explore the benefits of diversification, how many stocks to include for a balanced portfolio, and why funds may offer a simpler approach?
Diversifying With Funds
Investing in individual stocks can be rewarding, but it also comes with its own risk. An easier way to gain broad exposure is through exchange-traded funds (ETFs) or mutual funds. These are collections of many stocks, sometimes even thousands, that give you access to various companies across different sectors in one investment. Some funds cover nearly the entire stock market, while others focus on specific sectors like technology or healthcare.
Funds make diversification easy because they spread your money across numerous companies, reducing the risk that any single stock will significantly impact your portfolio. Additionally, because they’re managed collections, they require less active decision-making than building a portfolio from individual stocks alone.
Popular index funds, for example, give exposure to either a broad market or specific sectors, making them a convenient option for long-term investors who want steady growth with minimal hands-on involvement.
How Many Individual Stocks Should You Own?
For investors interested in choosing individual stocks, diversification remains key. Owning just a couple of stocks can be risky, as the value of your portfolio depends heavily on the performance of those few companies.
Research shows that holding a larger number of stocks helps reduce what’s known as “unsystematic risk” — the risk associated with a specific company. One study found that owning about 15 different stocks could achieve a level of risk similar to the overall market. However, other research suggests that a range of 20 to 30 stocks provides more effective diversification, making your portfolio less likely to be negatively affected by the poor performance of any single company.
Equally important is spreading your investments across different sectors. For example, if all your stocks are in one industry, like technology, a downturn in that sector could impact all your holdings. Instead, diversifying across sectors—such as healthcare, energy, and technology—reduces the risk of being overexposed to one part of the market.
Combining Stocks and Funds for Balance
You don’t necessarily have to choose between individual stocks and funds. Many investors find that holding a mix of both provides a good balance of stability and potential growth. By investing most of your money in funds, you create a stable foundation that’s broadly diversified. Then, you might add a few individual stocks to increase growth potential or invest in specific companies you believe in.
This approach allows you to treat the individual stocks as a smaller portion of your portfolio that you’re comfortable with taking more risks on. Essentially, if you can afford to lose the amount invested in these individual stocks without affecting your long-term financial plans, then a combined approach could work well for you.
Final Thoughts
Finding the right number of stocks for your portfolio depends on your goals and comfort with risk. ETFs and mutual funds offer a straightforward way to diversify, often including hundreds of stocks in one investment. For those who prefer picking individual stocks, aiming for 20 to 30 across various sectors can help manage risk and keep your portfolio balanced.
Combining funds with a few individual stocks can provide both security and growth potential. By diversifying and balancing your choices, you create a solid investment portfolio that can help you achieve your financial goals over time.
