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How Many Stocks do you need to build a Winning Portfolio?

Updated: Mar 2

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

 

Note: this content is targeted towards retail & active investors (who are looking to pick their own stocks).

Diversification is crucial and beneficial.

  • However I am not a fan of "over-diversification".

  • Over-diversification = when there are more than 10 stocks in one's portfolio.


Don't put all your eggs in one basket
Do not put all your eggs in one basket.

Why I think having more than 10 stocks in one's portfolio can be counterproductive.

  • The time and energy required to monitor the companies' fundamentals (ie, staying updated on financials performance, plans & news) can be overwhelming.


  • Contrary to popular beliefs that long-term investors can just "do nothing",

    • It is important for active investors to ensure their companies' fundamentals are still intact to sustain their projected growth over the stipulated investment period for the investor.

    • Since technology is improving rapidly and that may cause a lot of disruption for existing industries which our companies are operating in.

When is it acceptable to have more than 10 stocks in your portfolio?

  • If you are however, looking to invest a very small stake in a company (ie 0.1% of your total portfolio's worth in a promising startup)

    • and if losing the capital will not deter you from your long-term financial plan.

    • you can exclude these small speculate stakes from 10 stocks from your portfolio.



Ideally, all the returns of the stocks in your portfolio should exceed your required annual returns.


Note: To find out your required annual returns, read this article.

  • Let's say you:

    • will need to achieve annual returns of 15% and

    • plan to have 10 stocks in your portfolio.

  • Ideally, this is how your portfolio should look like:

Stock name

Annual projected returns

Stock 1

​ => 15%

Stock 2

​ => 15%

Stock 3

​ => 15%

Stock 4

​ => 15%

Stock 5

​ => 15%

Stock 6

​ => 15%

Stock 7

​ => 15%

Stock 8

​ => 15%

Stock 9

​ => 15%

Stock 10

​ => 15%


  • In reality, some adjustments will be required.

  • For example, a portfolio may look like this instead:

Stock name

Stock allocation

Annual projected returns

Stock 1

10%

20%

Stock 2

10%

20%

Stock 3

10%

20%

Stock 4

10%

20%

Stock 5

10%

20%

Stock 6

10%

10%

Stock 7

10%

10%

Stock 8

10%

10%

Stock 9

10%

10%

Stock 10

10%

10%

  • which will still generate a total annual projected returns of 15%.


  • Or if an investor would like to include some alternative investments such as ETFs, Gold, Reits & Bonds in their portfolio,

    • they may need to adjust their portfolio to be something like this:

Asset name

Asset allocation

Annual projected returns

Stock 1

10%

21%

Stock 2

10%

21%

Stock 3

10%

21%

Stock 4

10%

21%

Stock 5

10%

21%

Stock 6

10%

21%

ETF ⚖️

10%

8%

Gold 🟡

10%

6%

Reits 🏢

10%

8%

Bonds 📃

10%

4%

  • which will also generate a total annual projected returns of15%.


  • Try it out on this tool (Portfolio builder)

    • (method to use): download the sheet and pluck in your respective figures.


  • For more info, you can refer to my portfolio here.


For more in depth information:



To read next:



 

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