The Ideal Portfolio Size

Know Thyself

We are taught to look at a number of things when we advise clients about their portfolios or before we start managing them. We call it an investment policy statement and while different portfolio managers have different approaches to this, it all boils down to understanding the client better. 

If you’re an individual investor, you are the client so actually understanding your own return objectives, and current circumstances, risk tolerance and any possible constraints (such as taxes, schooling, large expenses, mortgage payments), is just as important. You also need to examine how your stock portfolio will tie in with your other investments. 

Don’t forgo this step. You may think you know yourself but it isn’t until you really start to examine your situation and your views that you realize there are still things to learn. 

Investing Experience

You don’t have to be a finance professional to manage your own portfolio. I know people who’ve been managing their own portfolio for years and probably understand the market better than many professionals I've come across. Open up Twitter, and you’ll see what I mean. 

Equity research is time consuming and that’s why there are a huge number of bankers and fund managers who work 60-hour weeks and get paid a lot. But, as with everything in life, experience always makes things easier and faster. You gain enough experience to do well if you give it a bit of time. 

As you start to gain a better understanding of 10Ks, and company information, your research process will become quicker and better. What’s more is if you’re following the same company quarter after quarter, you’ll definitely be able to pick up on things faster after a few periods. So all you need to do is update your research with every quarter. 

Time to Spare

You don’t have to spend years watching the market before you invest. But you do have to spend some time reading up on the company  and you have to spend even more time keeping track of the company once you’ve invested. So if you don’t have the time to thoroughly research 50 stocks, I’d say keep it to a number that you can look at, without spending your entire day watching the screens and shutting out your family. 

However, if you’re going to be putting money in the market, you have to take the time to read. I’ve read balance sheets for a living for the last 17 years and it takes me less than 10 minutes to size up a company’s numbers. However, proper research when you’re dealing with actual money takes much longer and even though I’ve done it all my career, I don’t skip steps. I read everything!

More is Not Better

Diversification… is often a very misunderstood concept. Many people think that adding more stocks will result in a balanced, diversified portfolio. This is not true. There’s a lot that goes into professional portfolio management, with a whole lot of math. 

But, you can mimic some of that without a lot of the math. When you look at the names in your portfolio you should check:

1. How many are from the same industry / sector e.g., you don’t need to own Walmart, Target, and Costco

2. How many are of the same size e.g, small cap, mid cap, large cap

3. Factor - value, core, growth, slow growth, medium growth

It’s easier to do this with fewer stocks, so here’s another reason to probably keep your portfolio to a manageable size. 

Do you need to be diversified? That’s probably a discussion for another day but it will depend on your personal risk tolerance. I know people who’ve only got tech stocks and been happily reaping the rewards of the recent bull market. 

What the Experts Say

Every expert will have their own target number. At one point, Peter Lynch owned more than 1400 stocks in his fund but his fund size was over a billion dollars... and he had help. (He still burned out though). 

Most smaller funds and family offices tend to have smaller teams and if they haven’t outsourced their portfolio management, the count tends to be 30 to 50. The $300million equity portfolio I managed for my ex-boss had a maximum of 20 names because we had other assets to manage. 

Peter Lynch seems to suggest 5 companies are enough. You only need one or two of those holdings to become multi-baggers for you to do well. He may have been right for his time. In his day, company information was not as easily accessible as it is today. Fees and costs were also much higher. 

Jim Cramer, another champion of the individual investor, suggests a maximum of 10 because he feels it’s the ideal size that an individual can keep track of without making it their day-job. I tend to agree. 

My Verdict

My view is that 10 to 15 stocks should give you a nice number that you can keep on top of. I’d also recommend building up this number over time - research a company, get comfortable, then buy. 

One important thing to remember is that even if you do hold 15 names, you’re probably researching many more to find opportunities, or to even substitute holdings for when things change. You probably won’t be living with the same 15 companies until you retire so you may end up researching 5 to 10 more names every few months. That’s why keeping your holdings at a manageable level is a good idea. 

Remember there’s always a story behind the numbers, learn the story well and then venture out for more.