How Many Stocks Should You Ideally Hold in Your Portfolio?

It's always a tricky question to answer. Some analysts recommend to diversify your portfolio and hold as many as 15 stocks, while others say 5-10 stocks is ideal. But, anybody trying to answer the question may not be painting an accurate picture.

Why diversifying your stock portfolio may not always pay-off?

Let us say that you have Rs 100 and buy 5 stocks. These stocks are from diversified metals, IT, cement, pharma, banking and construction.

Now, the IT and pharma stocks are defensives. When the economy recovers, they may not give you as good returns as cement, banking and construction in your portfolio. This means your returns are restricted. Now, if the economy recovers and you place all the 5 stocks in economy driven stocks your returns would be far superior.

Hence, diversifying your portfolio has given you lower returns. On the other hand when the markets fall, the defensives stocks like IT and pharma will prevent a sharp deterioration in your portfolio as these are defensive stocks.

Hence, diversifying your portfolio may not necessarily give your super returns, but, may help in the events markets fall. The mantra for stocks continues to remain, "higher the return higher the risk".

How many stocks should I then have in my portfolio?

There is no formula for success. In 1996, if you had to invest your entire money in Infosys, you would have already become a crorepati. But, if you had to diversify your portfolio and only only buy a small quantity of Infosys, you would not have made super returns. The thought is that just buying one stock of Infosys in your portfolio would have been enough to give you good money, rather than having 5, 10 and 15 stock. This debunks the theory of portfolio diversification.

Conclusion

There is no answer to how many stocks you should have in a portfolio. If you are convinced that the one stock in your portfolio can give you super returns, go and buy that. Diversifying may or may not help in giving you superior returns.

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