The first step towards building your stock portfolio is to decide the number of stocks you should own.
The answer may be clearer if we ask: how many stocks can you manage?
For each stock you hold, you may have to look out for company announcements, read annual reports, keep abreast of industry developments, attend AGMs, size up the competitors, analyze its stock chart, etc.
Another consideration is the possible detrimental effects to your stock portfolio by owning too many stocks.
If you have a stock that doubles in price but you hold 30 stocks, the increase in your portfolio’s worth is only marginal.
But if you own 5 stocks and one of them goes up 100%, your portfolio's value will increase significantly.
In buying a small number of stocks, you would tend to be more stringent in filtering the stocks for your portfolio.
Having ‘put your eggs in a small basket’, you would also naturally pay more attention to your stocks and develop a feel of how each stock behaves under different market conditions.
You should choose to own a number of well selected stocks that you can effectively manage with respect to your time and capital devoted to stock investments.
Peter Lynch owned around 1,400 stocks during his time as a portfolio manager with Fidelity Investments.¹ He had 9 billion dollars to manage and a research department behind him.
For an individual investor with limited resources, consider the following suggestion
You should also set a limit on the number of stocks you want to own.
For example, if you already own 6 stocks but come across a stock that you want to buy, you should sell one of your underperforming stock before purchasing a new stock.
Even if your portfolio size is in the millions, the upper limit for the number of stocks you own should not be more than 12-15 stocks.
When you are competent in stock investments, wide diversification may not be desirable.
Once you have decided on the maximum number of stocks to own, you should learn how to select the right stocks for your portfolio.
If you own a list of stocks that can be arranged into a restaurant menu, you'll probably need to review your stock portfolio. Consider selling the poorest performers and put the proceeds into your best performers or hopeful potentials periodically.
1. Peter Lynch with John Rothchild, One up on Wall Street, First Fireside Edition 2000, Pg 239