If you are building a long-term investment portfolio, aside from “which” stocks to own, “how many stocks” and “in what weights” are also critically important questions that will determine your level of success. If we had a working crystal ball, the answer would be: 1 stock (i.e. the one that is going to go up the most). But because we cannot exactly predict the future, we build an intelligently diversified portfolio that diversifies away the big risks, but still leaves plenty of room for long-term compound growth.

25 to 30 Stocks is the “Magic Number”

Approximately 25 to 30 stocks is the “magic number” to be diversified (according to a popular 1970 study by Fisher and Lorie) as you can see in the chart below (i.e. once you own 25-30 stocks, you’ve already diversified away the lion’s share of stock specific risk, from a standard deviation standpoint).

“The Entire Market” View

And while the 25-30 stock number has been widely popular for decades, some academic types (i.e. nerds) believe standard deviation is the wrong metric, and 60 stocks is the bare minimum, but holding the ENTIRE MARKET is ever better (as you can see in the following table) when you consider “more prudent” metrics like tracking error and R-square.

Of course there are huge biases (and conflicts of interest) by the people creating the studies. For example, many academics will push the maximum diversification story (i.e. just buy a market ETF and own ALL stocks) because they have little to no real world experience/skill and they personally are better off this way.

Similarly, many real world “sales people” (CFP types, nothing against them, they can add value in other ways) with little to no actual investment experience/skill will also push the passive ETF story (because it’s easier for them and their business can generate more sales selling the passive ETF story).

For a little perspective, low cost passive market index funds, such Vanguard’s S&P 500 ETF (VOO) holds… you guessed it… approximately 500 stocks. And Vanguard’s Total US Market Index Fund (VTI) also holds small caps (in addition to the S&P 500) thereby bringing the total number of stocks to around 3,600!

Individual Stocks + Passive ETF Strategies

If you are managing your own investments, a good strategy may be to own just a small handful of stocks you like, but to offset some of the risks by also owning a low cost ETF (like VOO or VTI). This way you get to generate some excess returns (if you pick right), and you don’t have to follow a huge number of stocks (because you get passive market exposure to the market).

How Much of Each Stock Should You Own?

Here is a look at the top 10 stocks (and their weights) in the Vanguard Total US Market Index Fund (VTI)

As you can see, the largest individual stocks around around 5-6% of the market, while many of the thousands of smaller stocks are far less than 1% each. So if you are going to own individual stocks, I’d recommend not going to far above their weight in the index (so maybe 5-6% in extreme cases, but in most cases less than that).

A Note on Risk Management

And if you are going to pick individual stocks, you may also want to give some consideration to your diversification across market sectors and styles too. For example:

Sectors: You may want to keep your portfolio weights roughly close to the market in terms of sectors (there are 11 GICS sectors, such as technology, consumer staples, materials, etc.).

Market Caps: Consider keeping market cap weights (small, mid, large and mega-cap exposures) loosely similar to the market index (such as VTI) otherwise you could inadvertently be taking on high risks versus the market.
International: Consider adding a little international exposure too, but there are different opinions on this one. For example, Vanguard founder Jack Bogle didn’t really think too much international exposure was necessary.
Style Exposures: Stay cognizant of the ebbs and flows of growth and value, especially in light of interest rate dynamics (i.e. keep your emotions in check as you invest for the long-term).

The Bottom Line:

If you are going to invest in individual stocks, do so responsibly! That means don’t take on too much weight in any one stock (because it exposes you to too much risk—this is your nest egg we’re talking about here, and too much risk is a big no-no!).

And if you are going to own just a few individual stock, consider complementing them with a bigger allocation to a few low-cost passive market index funds (such as VTI, as discussed earlier).

At the end of the day, you need to do what is right for you, based on your own personal situation. Consider discussing your goals and situation with a professional. And remember, disciplined goal-focused, long-term investing continues to be a winning strategy.

How Many Stocks Should You Own?