When you are starting out in online stock trading, you may have a major doubt running through your mind. How many stocks do you need in your portfolio to taste success consistently? The Motley Fool’s analysts give their opinion on this.
If you really need to get a number, researchers have suggested from as little as 10 stocks to 120 stocks. There is no fixed number of stocks that can minimize your risk and maximize your reward through all the turmoil and unpredictability.
Legendary investment guru and Warren Buffett’s mentor Benjamin Graham has famously suggested owning stocks between 10 and 30, which would certainly be a lot better than tracking 120 stocks particularly if you are managing your investment strategies singlehandedly as a side income activity and you don’t have a team of portfolio managers and stock analysts working for you. And the experience of Graham makes this advice really worth following. With 10 sectors present in the S&P 500, owning just a few names would not adequately spread the risk to sufficient sectors.
Index Funds and a Few Individual Stocks
In other words, own only as many stocks as you can track. This particularly applies to investors who wish to own individual stocks. They must carry out the required research on the stocks they own. So the more stocks you own, understand that the greater will be the homework you need to do. If that consumes too much time and effort it would be better to own lesser number of stocks, though the downside of that is you wouldn’t be able to diversify much. One solution from this conundrum is to invest the majority of your capital in index funds and then include a few individual stocks. This will help you stay diversified while also keeping everything more manageable.
Ask Yourself, Are You Ready for Individual Stocks?
But owning individual stocks may not be the right choice for you if you aren’t quite prepared for it. It may not be appropriate for everyone. So how can you realize if you are ready for individual stocks?
- You need to ask yourself if you understand the volatility of individual stocks and the stock market.
- Can you ensure that you will exercise discipline and patience in making stock decisions and not be led by emotions? Emotional decisions and panic-infused, knee-jerk reactions in relation to the rise and fall in stock prices could hurt your long term prospects significantly. Can you understand financial statements and assess the value of companies through growth rates, profit margins, debt levels, inventory turnovers, asset and equity returns, etc?
- Finally, and most importantly, you need to determine whether you are investing for at least five to ten years, or more. You should ensure that the money you need soon is kept in places that are less volatile.
If you find you aren’t prepared for individual stocks, it would be better to stick with index funds that are based on the broader market such as the S&P 500-based ones. You’ll find that they usually perform better than the stock mutual funds through longer periods.
Online stock trading can be a lot more successful with the right trading software and online tutorials. You’ll find these at TradeZero. Give us a call at +1 954-944-3885, or email us at email@example.com.
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