How Many Stocks Should You Have In Your Portfolio? (Does Warren Buffett Diversify?)

The common investing advice these days is to diversify your portfolio as much as possible. Most financial advisors would advise you to invest in an index fund, such as the s&p 500, and allocate some of your portfolio towards bonds, gold, and other assets. Is this really the best way to long term wealth?

The most successful investors in the world actually disagree with this premise, and are often huge critics of diversification. Investors like Warren Buffett argue that if are very confident in a few investing ideas, all of your capital should be allocated there instead of other stocks or bonds to which you know very little about.

It is important to note that even with diversification, you are still taking significant risk. Index funds fell 50% in 2008, and even a portfolio with stocks, bonds, and gold would drop over 20%. This is because of something called systemic risk. After investing in 20 stocks, adding more to a portfolio does not lower risk… but DOES lower returns. This is because every new stock added would dilute the gains of an outperforming stock.

However, if you have a concentrated portfolio you must make investing choices wisely. If you only buy stocks when they are at a 50% discount, you take on less risk than the market as a whole and experience the potential for very large gains. Using this 50% margin of safety increases returns and lowers risk due to unforeseen events such as a market crash, business failure or miscalculation of value.

Even today, we see that Warren Buffett has over 50% of his portfolio in only 5 stocks. He has been investing this way his entire life, and shows that a heavily concentrated portfolio in investments you believe in is the best path to long term wealth.

So how many stocks should you own? You should only own as many stocks as you can keep up with at least weekly. If you don’t have time to keep up with the 20 stocks you have, you need to cut back on your portfolio. In addition, only invest when there are good deals to be found. With the market at all time highs, I am struggling to find good investment opportunities and when this happens it is perfectly okay to do NOTHING and wait. The market will come down to more fairly valued levels eventually, at which point there will by many stocks waiting to be bought.

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[InvestingClub]

Hey everyone! I've came down with a bad cold so sorry for sounding monotone lol. See you all soon!

[ianbaker]

Good reminder to always keep in mind the principles of value investing. For most people however, diversification through ETFs is the safest and best option. I believe even Warren Buffet agrees with this. Buffet is an extraordinary individual and it may be quite foolish for the average Joe to think he could achieve a similar outcome. I've had my fingers burnt before, it's incredibly difficult to really know what's going on in individual companies and they do go bust from time to time. I guess it all comes back to risk and reward.