Like many other financial questions, the answer to how many investments you need in your portfolio is, “It depends.” The solution is contingent on several different things including the type of account you’re working with, the amount of money you have, and the time you’re willing to commit to it. As a result, the right number of investments may range anywhere between one investment and forty.
For those just starting out and with $10,000 or less in their retirement plan, one asset allocation fund may serve as the ideal scenario. Asset allocation or target date funds offer investors the opportunity to focus on establishing the habit of saving and investing early on while also providing the necessary asset allocation to hit the major asset classes including large-cap, mid-cap, small-cap, and international options as well as fixed income or bonds.
As investors accumulate more funds and seek greater returns, more income, or access to alternative options, the number of investments that can make sense in your portfolio jumps from one to twelve. Now twelve isn’t a definitive number, but a dozen different funds is a useful number that’s easy to remember and perceive in a portfolio. Once again, this number allows investors to hit the major asset classes as well as tilt their portfolio to meet their life stage or personal preferences. Filling twelve spots means an investor can not only hit the popular equity asset classes such as large-cap, mid-cap, small-cap, and international but also for them to decide whether they want those areas to be growth or value focused. Additionally, the number allows access to lesser known areas such as emerging markets, specialized funds that target areas such as health care or technology, and even real estate or gold.
Let’s not forget the fixed income side of the equation. Investors will still have room to add a few bond considerations including a broad based bond fund as well as a high-yield option and one designed to minimize inflation.
Moving from twelve to twenty or more can make sense for investors with multiple accounts and who wish to not only add alternative asset classes such as private equity but who want to start to use individual securities and move away from packaged products like mutual funds and ETFs. Whether you overhear a great investment opportunity at a dinner party, catch it in a Forbes.com article, or hear it on TV, stepping outside of the realm of packaged products can provide both personal and financial benefits.
Personally speaking, it gives investors something to talk about and watch, while providing investors the opportunity to see how an individual stock works and responds to different market reports and conditions. This can in turn lead to more insight as it relates to certain industries and even broader asset classes… and ultimately the ability to make more informed financial decisions.
This is the most popular range for investors but can be one of the most confusing. Many times, investors who are married or have multiple accounts end up with a combined twenty investments or more but don’t realize they may not be as diversified as they may think. In a nut-shell, packaged products in similar asset classes often own the same underlying stocks and bonds. That means, two different funds can own many of the same investments and thus provide very little asset allocation. That’s an important point that illustrates it’s not the sheer number of investments in the portfolio that matters but instead, how those funds work together toward your retirement goals.
Finally, for those interested in building a professional portfolio with individual stocks, bonds, and other asset classes, the number of investments in your portfolio can quickly climb to thirty or forty holdings. For simplicity, I often suggest that thirty-three investments is a good starting point for individual securities. Once again, it’s not a definitive number but is important from a risk management perspective. Technically speaking, if you equal-weight (invest the same amount of money) into thirty-three separate investments you allocate 3% to each holding. This helps reduce single stock risk. Often times, investors are encouraged to avoid individual stocks because of the perceived risk of one stock going belly-up and ruining the portfolio. However, by limiting the amount allocated to each investment you can reduce the role each stocks plays in the overall portfolio. For example, if you have a $300,000 portfolio that means $9,000 would go to each holding. Assuming the worst, let’s say your first purchase drops by 20% immediately after you buy it. That would equate to a $1,800 loss right off the bat. Of course, nobody wants that to happen but by putting it into perspective you can see how the numbers make sense as it only creates a total portfolio loss 0.6% (basically a ½ a percent).
Additionally the thirty-three number allows investors to purchase two or more stocks in each sector of the economy (technology, financial, materials, energy, services, communication, etc.) as well as use packaged products like ETFs to diversify into areas such as small-cap, mid-cap, emerging markets and more. One caveat though, the time required to monitor and manage a portfolio of this size and make up can double and triple your homework and research requirements when compared to other approaches. So be sure to align your portfolio design and number of holding with the time you plan to commit to it.
It’s common for investors to wonder how many investment holdings will help create the perfect portfolio. While the answer may vary based on their life stage, portfolio goals, and personal preferences, it’s important for investors to realize that it’s not the number that matters but instead, how their funds are allocated among those holdings that will have the largest long-term impact.
