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Sunday, August 19, 2012

How Many Stocks Should You Own?

How many different stocks should you own? There is no absolute answer to that question – every investor will come up with an answer that suits his or her particular situation.

However, many investors find holding around 15 - 20 individual stocks spread over five to seven different industries gives them a well-diversified portfolio.

If you are just starting out, don’t panic and think you have to get to this level all at once. This is a goal, not a starting point.

Even then, the most successful individual investor of all times, Warren Buffett is not sold on the value of spreading your money over a large number of stocks. However, since we’re not Warren Buffett, the prudent thing to do is protect yourself with a diversified portfolio.

What your stock portfolio looks like depends on several things:

• Your financial goals

• Your risk tolerance

• Your time horizon

These factors will drive how conservative or aggressive your mix of stocks is.

If your strategy is conservative, your portfolio will favor stocks from industries that tend toward slow, but steady growth in all types of business cycles, such as:

• Consumer staples stocks

• Utility stocks

A more aggressive approach might target these investments:

• High growth stocks

• Technology stocks

The conservative investor will want to focus more on larger, well-established companies, while a more aggressive investor might look for some percentage of investment to go toward smaller, emerging companies with larger potential for growth, but at a higher risk.

Of course, stocks are just one part of a diversified portfolio. Spreading your money over different asset classes to include bonds and cash as well as stocks gives you a better risk profile.

The more conservative investor will place more assets in bonds and cash, while the aggressive investor will do the opposite and fund stocks over bonds and cash.

Don’ get hung up on meeting an arbitrary number for filling out your portfolio of stocks. The important consideration is to find a balance that meets your financial goals and works with your risk tolerance. As long as your portfolio is diversified by industry and asset class, you are taking the right steps toward building a sound financial future.