Ideal Stock Market Portfolio as per studies - How many stocks should be in my portfolio? - YouTube

How many stocks should I have in my portfolio?

This is a question we receive every time

And it is a good question according to me

Because when we prepare our portfolio, we spend a lot of time and efforts

in stock research, analysation,

Track them in future, follow them, keep an eye on their quarterly results

But the profile of every investor is different, some are beginners and some are experienced

Some have huge portfolios, some have small portfolios

So should there be an equal number of stocks in everyone's portfolio

Maybe not. This is what we're going to discuss in this video

So in this video, we'll try to keep a practical and scientific approach

What is the ideal number of stocks that should be there in our portfolio?

With this, there is a special announcement at the end of this video, so stay tuned

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So before starting this video, let me clarify that this is not a financial planning video

We'll not discuss how to prepare a portfolio, how much portion to invest in equity and how much in debt, how much in gold, real estate

I made separate videos for all these

How to invest in 30's, how to invest in 20's

So you can watch those videos

In this video, we'll concentrate on stocks, that what should be the ideal number of stocks in our portfolio

The first question that arises is what is the need to invest in multiple stocks?

And why to create a big portfolio?

Definitely, this is also a valid question

So let's say that someone researched well in 1-2 companies, so should he invest in those 1-2 companies only?

According to me, No!

And scientific studies also say this

Its reasoning is related to high risk

Let's say that the risk is very high in those 1-2 stocks you selected

What if any problem occurs in that sector or company

So it is just like a lottery, if you're lucky then you can make huge returns

But if not, then you may lose all your capital.

That's why it is very important to analyse our risks also if we're seeking high returns

In fact, it is a famous saying in investing that

"Risk management is more important than potential returns"

And why do people say that? For this, we need to understand risk properly

There are 2 types of risks

1. Systematic risk

Which is the risk of the overall market

That means maybe the Indian economy doesn't go well, any political issue

If the economic sentiments of the overall world are negative, then the market shows an overall direction

That is called Systematic risk

That means there may be a problem with the whole stock market due to any reason

2. Unsystematic risk

That means there may be a problem in any specific company or any sector

So in this video, we'll be focusing on the unsystematic risk

Let me give you an example to understand the unsystematic risk properly

As we can see on this excel sheet, I made 2 portfolios and these are the hypothetical examples

Let's say an individual is investing in only 5 stocks, i.e diversification is very less and he's investing in very less number of stocks

Let's say he created a portfolio of Rs. 2 lakhs and invested Rs.40,000 in each stock

After 10 years, 2 of his selected stocks didn't performed well

Let's say in one of those 2 stocks, Rs.40,000 remained Rs.10,000

And in the other stock, Rs. 40,000 remained Rs.20,000

The other 3 stocks performed well

One stock gave 4 times returns, the other gave 2.5 times, and the third one also gave good returns

But when you will calculate the overall returns, the returns are not very good

He only got 7.96% returns

Because 2 out of 5 were problematic stocks

So we will call it Unsystematic risk

So because there was not much diversification, the risk became higher

Because of this, the annual returns decreased

And this scenario is very likely especially when the people are new to the stock market

Because they start with less number of stocks and only invest in those stocks about which they know

Out of those 3 companies, if 1-2 fails then your return may get reduced very much and it may even go in negative

However, I averaged out the returns in 10 years

If we consider another portfolio in which the individual decides to invest in many stocks

because everybody told him to diversify the stocks

And he invests in 50 stocks directly

Since the capital is Rs.2 lakhs, he invested Rs.4,000 in each stock

And here also, I considered very reasonable returns

Let's say 10 out of 50 stocks turns out to be a failure

On an average, his investment decreases to half in each of those stocks

And in the remaining 40 stocks, some gave 1.5 times, some gave 2 times, some gave 2.5 times returns

And even some stocks gave 3 times, 5 times or 10 times returns as well

If we talk about a horizon of 10 years,

Then if the returns will be above 3 times, the overall returns will be more than 12 % and then we'll consider it as a good returns

In some stocks, the money made was tremendous

So ideally, the way should have been to focus on these 10 stocks only

Could he have identified these 10 stocks?

The answer is yes!

But when we're talking about 50 stocks, can he put that much time and efforts

In this case, his annual returns were reduced due to over-diversification

So on one side, an individual is creating a portfolio of 5 stocks and on the other side, another individual is creating of 50 stocks

None of them is right and we need to find a middle way

What do scientific studies say?

In 1952, Harry Markowitz received Nobel prize for Modern Portfolio Theory

In that, he said that a practical approach can be implemented in which many stocks can be selected

Based on the risk tolerance of different individuals, i.e everyone has a different risk tolerance

due to that person's condition or comfort level

But it has a major principle of a diversified portfolio

And he proved that when the portfolio is diversified, the risk-adjusted returns are always better

That's why Unsystematic risk can also be called Diversifiable

That means we can mitigate it through diversification

But we saw that when we over diversify, then also the returns decreases

And whenever anyone invests in the stock market, he expects alpha returns

What is alpha?

The returns given by the benchmark indices

Let's say if anyone invests in Nifty50

Then if he's getting 10% returns on an average, and if we are beating those returns by 2%

Then the 2% becomes the alpha

That means the returns generated above the benchmark are called alpha returns.

So if anybody invests money directly in the stock market, he wants to generate alpha returns

So over-diversification also leads to a loss in alpha returns

Because as we saw in our example, to track a high number of stocks, you need a lot of time and efforts

And a retail investor cannot do that

So how to find a middle way?

So what should be the minimum and maximum stocks in a portfolio

There's not any hard and fast rule but scientific studies say that an ideal portfolio consists of 25-30 stocks

Because the unsystematic risk in 30 stocks is reduced by 90%

But on the other side, a question arises if there's a new investor then should he directly invest in 30 stocks?

So the answer is no!

You should invest at least in 10 stocks

So we discussed the minimum and maximum number of stocks in a portfolio but

But we'll soon discuss the profile of an investor

But before that, let's discuss how to diversify and select stocks?

If we need to select 10 or 30 stocks, how should we do it

So whichever stocks we're selecting, the point is to diversify them

So diversification doesn't mean selecting all the 10 large-cap stocks or 10 stocks of the same sector

It means selecting 1-2 companies from one sector, 1-2 from another sector

So firstly, I diversified my risk by investing in multiple sectors

That means you should at least invest in 5-6 sectors and select 1-2 companies from each sector

You should not depend on a single company of any sector

So this is one way

Secondly, you can pick one large-cap and one small-cap company from one sector

So diversify in this way as much as possible and with that

The second investing decision will be based on the fundamentals of the company

So this was one way of diversification

The second obvious way is to invest in Mutual Funds

If I want to buy only one mutual fund, then I'll buy a multi-cap mutual fund

They'll invest in all the sectors in all the large-cap, mid-cap, or small-cap companies

If I want to select 3-4 mutual funds, then I'll choose sector-wise mutual funds or

I can select a large-cap, a mid-cap, and a small-cap mutual fund

And it's not required to diversify a lot because one mutual fund of each type is more than enough

And if you don't want to invest in mutual funds, then you can invest in ETF's

The 3rd option nowadays is investing in Smallcase where we can diversify in different ways

If you want to explore smallcases, the link is in the description

You can explore it because it is also a good way of diversification

So there are many ways for diversification

Now let's come to our last section

What are the ideal number of stocks to invest in for different types of investors

Firstly, if there is a beginner investor, then in how many stocks should he invest

As a beginner, it is very important to diversify the risk

So you should definitely invest in at least 10 stocks

On the other hand, we need to put in time and efforts

Because we need to analyse, do research, and further follow it up

So you should not keep more than 15 stocks because your time and energy are also very important

So select only that many stocks that you can analyse easily

So beginner investors can make a range of 10-15 stocks

Any experienced investor who takes less time in analysing and researching and already have knowledge

He can keep 15-20 stocks

If anyone is having a huge portfolio

If we talk about an average investor, he can keep 10-20 stocks

But if anyone is having a portfolio worth more than Rs.20-25 lakhs

Then you can definitely follow the scientific research and keep 25-30 stocks

Because the selection of 25-30 stocks is generally for large capital and portfolio size

So on selecting 25-30 stocks, risk reduces and the chances of better returns increases because

the tendency on spotting the winners increases

Third, you're not putting as much time and efforts as you would have put in selecting 50-100 stocks

So 25-30 stocks are the most optimum for a large portfolio

But for an average investor, 10-20 stocks are more than enough

So this was about the ideal number of stocks in a portfolio

Now it's time for the special announcement

I made my individual profile on Twitter, company profile was already there

And I am frequently posting on Linkedin as well so you can get in contact with me there

So I share immediate thoughts, announcements firstly over there

Because that is the easiest way for me to post content so I want you to get in touch with me there

That's it in this video and if you liked it

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And I am sure that many people might be still thinking that how many stocks should they keep in their portfolio

I tried to tell you this on the basis of scientific studies

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