How many stocks do you need to have a diversified portfolio?
Many investors have portfolios of just 5 to 7 individual stocks.
They think they’re making smart bets.
But they’re actually asking for trouble.
Over the past 90 years in the American stock market, around 11% of all stocks were total failures.
But here’s the really scary part, which really struck me when I heard Canadian financial advisor Ben Felix mention it in a recent video:
As many as 40% of US stocks experienced catastrophic losses of 70% or more – and never recovered.
If you hold just a handful of stocks, you’re gambling with your future.
Now, some people think 20 to 30 stocks is enough diversification.
That’s certainly better than 5 to 7.
Having 20 to 30 stocks does reduce volatility – how much your portfolio swings up and down.
But you’re still likely to get a suboptimal long-term result.
Why?
Because there are thousands of stocks in the market.
And just a tiny fraction of them create all the wealth.
Over the past 90 years, just 83 stocks out of 26,000 were responsible for half the investor wealth creation in the entire US stock market.
Think about that for a moment.
Half of all the wealth creation came from 0.3% of all stocks.
So if you own just 20 or 30 stocks…
Chances are you won’t have many – or even any – of the most profitable companies in your portfolio.
You’ll miss out on the powerful gains that really compound your wealth over time.
You’ll watch from the sidelines while other investors succeed.
According to research, you need 200 to 300 different stocks to be truly diversified.
But there’s no way for amateur investors to manage that.
You can’t research hundreds of companies.
It’s expensive to buy all those individual stocks.
It’s completely unrealistic.
That’s exactly why index funds and ETFs are such a great solution.
They let you own hundreds or even thousands of stocks with a single purchase.
They capture those rare, wealth-creating companies automatically.
They give you maximal diversification at minimal cost.
While stock pickers are gambling on a few companies…
You own a piece of the entire economy.
While they’re missing out on the next Apple or Amazon…
You’re guaranteed to capture whatever the next big winner turns out to be.
While they’re stressed about picking the right stocks…
You’re calmly building wealth with near mathematical certainty.
Which approach sounds better for your financial future?
I help busy Europeans become confident passive investors through a practical, step-by-step training program called The Index Masterclass.
Click here to access my free training for European investors.