You Need to Have More Than 10 Stocks in Your Portfolio

When it comes to investing, one principle stands tall among all others: diversification. It’s often said that you shouldn’t put all your eggs in one basket, and nowhere is that more relevant than in stock market investing. Yet many investors, especially beginners, tend to concentrate their portfolios in just a handful of stocks, often under ten. While this might feel more manageable or focused, it could expose you to unnecessary risk. In this article, we'll explore why having more than 10 stocks in your portfolio is not just a good idea, it’s essential.

The Importance of Diversification

Diversification involves spreading your investments across different assets, industries, or geographies to reduce risk. The idea is simple: if one stock or sector underperforms, others might compensate. By owning a broad mix of companies, you reduce the likelihood that a single event will tank your entire portfolio.

Imagine you own only five stocks, and one of them faces a sudden drop due to poor earnings, regulatory issues, or an unforeseen crisis. That’s 20% of your portfolio potentially wiped out. On the other hand, if you own 20 or 30 stocks, the impact of one underperformer is much less significant.

Read More: When to Cut Loss in Stock Investing

Why 10 Is Too Few

Many financial experts agree that a well-diversified portfolio should include at least 15 to 30 individual stocks. Here's why owning just 10 might not cut it:

1. Sector Risk: With 10 stocks, it’s difficult to adequately diversify across all sectors of the economy—technology, healthcare, finance, energy, consumer goods, etc. If, for example, half your portfolio is in tech and the tech sector suffers, your losses could be steep.
2. Company-Specific Risk: Each company carries its own set of risks. A scandal, product failure, or management misstep can significantly affect stock prices. With only 10 holdings, you’re more vulnerable to the fate of each individual business.
3. Volatility Exposure: Concentrated portfolios tend to be more volatile. While they may offer the potential for outsized gains, they’re also more likely to experience wild swings, which can be emotionally taxing and financially damaging.
4. Missed Opportunities: By limiting yourself to a small number of stocks, you may be ignoring excellent opportunities in other areas of the market. Broader exposure increases the chance you’ll capture winners.

Academic Backing

Numerous studies have shown that the benefits of diversification increase rapidly as you go from 1 to about 20 stocks. For instance, a famous study by Evans and Archer (1968) demonstrated that owning 10 stocks carries the full volatility of the market. As you add more stocks, the unsystematic (company-specific) risk diminishes.

According to their findings, about 90% of the diversification benefit is achieved by holding 20 to 30 stocks. Beyond that, the marginal benefit decreases, but for most investors, reaching that number is enough to meaningfully reduce risk while still maintaining manageability.

Real-World Examples

Let’s look at two hypothetical investors:

• Investor A owns 8 stocks, heavily concentrated in technology.
• Investor B owns 25 stocks spread across multiple sectors and geographies.

In a year when tech stocks underperform due to rising interest rates and regulatory crackdowns, Investor A sees significant losses, perhaps a 25% hit. Investor B, meanwhile, may only see a slight dip, as gains in healthcare and energy help offset tech losses.

By having a broader base, Investor B is not only protected but is better positioned to weather volatility and capitalize on growth across the market.

Counterpoint: The Case for Concentration

It’s worth acknowledging that some legendary investors, like Warren Buffett and Charlie Munger, favor concentration. They argue that owning a few great businesses is better than owning many mediocre ones. There is some truth to this, particularly for highly experienced investors who have the skill, time, and discipline to thoroughly analyze each company.

However, for most retail investors, the risk of getting it wrong is high. Unlike Buffett, we don’t have teams of analysts, private meetings with CEOs, or decades of experience spotting value. Therefore, diversification becomes a valuable tool to mitigate mistakes and reduce downside risk.

Practical Tips for Building a Diversified Portfolio

If you’re convinced that having more than 10 stocks is the way to go, here are a few practical steps to help you build a stronger portfolio:

1. Diversify by Sector: Try to own companies across all major sectors. Don’t overinvest in one area just because it’s hot at the moment.
2. Include Different Market Caps: Mix in large-cap, mid-cap, and small-cap stocks to capture a variety of growth and stability characteristics.
3. Think Globally: Don’t limit yourself to just your home country. Global diversification helps hedge against regional downturns.
4. Avoid Overlapping Holdings: If you own multiple stocks that are closely tied (e.g., several companies in the same industry or supply chain), you may be more concentrated than you think.
5. Use ETFs or Index Funds: If selecting individual stocks feels overwhelming, low-cost ETFs can offer instant diversification across dozens or hundreds of companies.

Read More: Investing in ETFs Is More Stable

Conclusion

Investing in the stock market involves a delicate balance between risk and reward. While it might be tempting to stick with a few companies you know and believe in, putting your trust in only 10 stocks can expose you to significant risks. The reality is that the stock market is unpredictable. Even the best companies can falter, and sectors can go out of favor for extended periods.

By owning more than 10 stocks, ideally 20 to 30 or more, you give yourself a much better chance of smoothing out the bumps and participating in long-term market gains. Diversification isn’t just a buzzword, it’s a proven strategy for protecting your wealth and positioning your portfolio for success.

Whether you're a seasoned investor or just starting, remember: breadth can be just as important as depth. The next time you're building or reviewing your portfolio, don’t ask yourself if you have enough winners. Ask yourself if you have enough diversity. Because in investing, strength often lies in numbers.