Diversification is not an end in itself, but rather a way to mitigate portfolio risk. So the question of "How many stocks should I own?" will be different for everyone ... but still, there are some good principles to think about.
Eddy Elfenbein, who writes about investing at Crossing Wall Street, is known for being a buy-and-hold investor -- CNNMoney named him "the best buy-and-hold blogger" on the Web -- and on his site, he has a public portfolio of 20 stocks. Last month, during an hourlong interview in Washington, D.C., I asked him whether he thought 20 stocks made for a diversified portfolio. Watch the following video for our exchange. (Run time: 1:40; a transcript follows the video.)
Brian Richards: Let me ask one more question about the size of the portfolio. So you have 20 stocks on the buy list. How many stocks would you advise a do‑it‑yourself retail investor to potentially own? Is 20 enough for broad diversification, or how do you advise people on that?
Eddy Elfenbein: Twenty is a very, very large portfolio. Actually you can be well diversified in as little as eight stocks. You'd be very well diversified in eight stocks.
Now, the key is being diversified. A lot of people feel I am diversified, I own Google and Apple and Oracle, and you want to have different categories. You want to make sure there are cyclicals, non-cyclicals, income stocks, tech stocks, health care -- always a good sector. And that's the way you can have a nice, balanced portfolio.
So you can be very well diversified with just eight stocks. I think the advent of online brokers and the lower commissions is great for individual investors and do-it-yourselfers who can get out and do that. And as you build up your portfolio I think if you're dedicated to following a name -- I have 20 names -- your goal should be you can have as large a portfolio as you can. ... I don't think there's any limit to that.
At the time thisarticle was published Fool.com managing editor Brian Richards holds no position in any company mentioned. The Motley Fool owns shares of Oracle, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Google and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. We tell you all this because of the Fool's disclosure policy.
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