If you read the business section of any major newspaper, you will be confronted with many different stocks in the United States and in other stock markets around the world. In light of the Enron and WorldCom scandals, most investors have learned the lesson of holding multiple investments. But with so many stocks available and limited time to make investments, how do you decide how many stocks you should keep at a time?
While there is no limit to how many stocks you can own at a time, you should limit the amount you directly own to ten or twenty so that you can easily monitor your investments. If you want exposure to more stocks, consider a mutual fund. This article introduces you to the basics of constructing a portfolio of stocks to meet your investment needs.
Investing in Different Sectors of the Economy
For conservative investors focused on high-quality, dividend-paying stocks, it is easy to fixate on a few industries such as utilities, telecommunications and financial services. Likewise, more aggressive investors may focus on rapidly growing technology companies. Assuming you are investing for a long term goal like retirement, strike a balance between low-risk and high-risk stocks. This principle can be illustrated with an example portfolio of 10 stocks:
- 5 stable, dividend-paying stocks: Consult the S&P Dividend Aristocrats list and other ratings to find suggestions for stocks that are known for their reliable stream of dividend income. In many cases, these stocks are well known American firms like AT&T and Johnson & Johnson.
- 5 stocks with rapid growth potential: Identifying stocks with rapid growth potential is much more difficult than finding blue chip stocks. One way to search for stocks with high growth potential is to look to companies that have recently had their first Initial Public Offering (IPO).
Investing In Foreign Stocks
In many situations, small investors overwhelmingly invest in their home countries and do not look abroad for investing opportunities. There are many worthwhile stocks to consider in Canada, the United Kingdom, Australia and other developed countries. Researching foreign stocks may be more difficult but you can reap the benefits of higher economic growth in other parts of the world.
If you are interested in emerging markets like China, India and Brazil, consider buying an Exchange Traded Fund (ETF) or mutual fund instead of directly purchasing stock. Such indirect investing can spare you the difficulty of reading annual reports and other materials in other languages.
Here is the geographical answer to the question of how many stocks you should keep at a time. Consider this example portfolio of stock holdings:
- U.S. Stocks: Hold 5 stocks in different industries such as financials, consumer goods, utilities and health care. Investing in different industries is a standard method of reducing investment risk.
- International Stocks such as Europe, Japan and other developed countries: Buy stocks from at least two geographic regions such as 1 to 2 in the UK and 1 to 2 in Japan.
- Emerging Markets ETF: Investing using an ETF index can be used to give you investment exposure to multiple emerging markets such as South Korea, Russia, China, India, Brazil and others. Review the geographical composition of the fund before making investment decisions.
Resources and References
To learn more about constructing a portfolio of stock investments and asset allocation, explore the resources below:
- Stock Investing, https://www.aaii.com/investing/stocks
- Asset Allocation Models, https://www.aaii.com/asset-allocation
- Beginners' Guide to Asset Allocation, Diversification, and Rebalancing (SEC), https://www.sec.gov/investor/pubs/assetallocation.htm
- Image Credit: Flickr user/korobokkuru