For an actively managed stock portfolio, 10-15 stocks can be a good number. For passive investors, more stocks could give better diversification, suggests Dhirendra Kumar
Hi, I am 26 years old and have been investing for the last four years (MFs and stocks). Now, I'm using Stock Advisor and selected 35 stocks for my stock portfolio. What is your take on the size of a stock portfolio, as the Value Research dashboard says having more than 15 is not good?
- Paarthiban R
No, I don't agree with you. Value Research's dashboard says that one can reasonably be well-diversified with at least 10-15 stocks and that is my general view. But having more stocks actually works differently for different people. Many people are comfortable with having 30 stocks. But if chosen carefully, then having even 10-15 stocks, which one is interested in, is also good when it comes to investing in stocks.
You should be interested in them and reading their periodic reports. Our analysts actually post all the big moves and updates periodically. They come back and tell you whether it is really a time to panic or get anxious if the stock price goes down rapidly. Alternatively, if the price goes up very rapidly, then our analysts tell you whether it is the time to sell. Those are the occasions when investors get really worried or get very greedy. It has happened in some of our recommendations.
For example, one stock actually went up by 80-90 per cent in the last three-four months and many investors are now asking whether they should get out of it. I don't think so because many of these companies are so good that getting out of them simply because they have gone up might be missing out on a big opportunity that lies ahead. The price may not go up but these companies could become a substantially bigger company and may justify a much larger price in a couple of years from now.
So, we are taking a view which is a few years away - can a particular small company become a very large company? This is because that is when you can make a lot of money. We are hoping that with Stock Advisor recommendations, we will have quite a few stocks that will become substantially bigger and it will translate into a big bonanza for you for a holding period of five-seven-eight years and that is a view I would encourage you to have. Think like an owner when you have bought these companies. Think that you have become a part owner of these companies. Be interested in them. You can't have the same level of interest in all the 40 companies, but you can be reasonably interested in 10-12-15 companies.
So, look at your span of thinking i.e. your ability to absorb things, stay interested and keep track of things. The more you understand, the more you'll stick through bad times. Because even good companies can also have an intermittent bad financial phase and sticking through that phase is very crucial, as most investors get out of it in a hurry.
Unfortunately, we have the stock market which opens every day and sees dramatic movements. Some of these great companies can have a daily swing of 5-7 per cent. So, if you want to become a day trader with these long-term opinions, I don't think it's a good idea. Don't lose sight of the forest for the trees.
I would say that choose your set of good companies. 10-15 can be a good number but you can do it even if you have 40 stocks. If you are actively managing, then for about 25 of them, you may have a nominal position and gradually, you can reduce those positions and emphasise 10-15 stocks in your portfolio. But even 40 is not a very large portfolio if you are running it passively and it just might provide superior diversification.