How Many Stocks Should You Have In Your Portfolio | Summary and Q&A

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September 9, 2017
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Value Investing with Sven Carlin, Ph.D.
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How Many Stocks Should You Have In Your Portfolio

TL;DR

Diversification is important to mitigate risk, but having a concentrated portfolio of high-quality stocks can lead to higher returns.

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Key Insights

  • ⛔ Diversification is a common strategy to reduce risk, but it may limit potential returns.
  • ✳️ The number of stocks in a portfolio does impact risk, with lower numbers resulting in higher risk.
  • 🥺 Focusing on high-quality businesses and their fundamentals can lead to better investment returns.
  • 🛀 Historical data shows that a small percentage of stocks significantly outperform the market.
  • 🔬 Investing in fewer stocks reduces the chances of underperforming the market but increases the potential for outperformance.
  • ⏳ Time and effort spent on researching stocks can lead to higher returns and lower risk.
  • 🪜 Adding more stocks to a portfolio increases the chances of underperforming the market.

Questions & Answers

Q: Should I have a diversified portfolio or concentrate on a few stocks?

It depends on your knowledge and investment strategy. Diversification reduces risk, but a concentrated portfolio of high-quality stocks can lead to higher returns if chosen wisely.

Q: Why should I invest from a business-like perspective?

Investing from a business perspective allows you to focus on the fundamentals of the companies you invest in, such as earnings, book value, and dividends. This approach reduces the emphasis on short-term stock price fluctuations.

Q: How many stocks do I need to outperform the market significantly?

Historical data shows that only a small percentage of stocks outperform the market by a significant margin. To have a good chance at finding these stocks, focus on a select few that you thoroughly research and believe in.

Q: Is diversification always the best strategy?

Diversification can provide protection but also limits potential returns. If you have the time and willingness to thoroughly research and monitor specific stocks, a concentrated portfolio can lead to higher returns.

Summary & Key Takeaways

  • The Modern Portfolio theory suggests having at least 40 stocks in a portfolio to minimize risk.

  • However, even with just 10 stocks, the total portfolio risk is significantly lower, and there is little difference between owning 10 or 100 stocks.

  • Investing from a business-like perspective allows for a more concentrated portfolio of the best businesses, leading to better long-term returns.

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