How Many Stocks Should I Own? Concentration vs Diversification
Updated: 1 day ago
Most people who do not research individual companies should own zero individual stocks and use a low-cost index fund instead. For investors who do the work, 10 to 20 carefully chosen positions is a sensible range: enough to survive a few mistakes, few enough that each holding is one you genuinely understand. Going much lower only makes sense for experienced investors with real skill and time, and only in businesses that pass every test.
Where this fits: this article belongs to the risk and portfolio section of Gingernomics. It applies the portfolio rules behind the Five Criteria. For the risk philosophy underneath it, read what is investment risk.
How Many Stocks Should I Own? The Short Answer
The internet gives conflicting advice. Some say 20 to 30 stocks. Some academics say 50 or more. Some famous investors say a handful is plenty. They are answering different questions for different people.
Here is a practical guide based on how much research you actually do:
Your situation | Suggested approach |
No time or interest in researching companies | A low-cost, broad index fund |
Learning to pick stocks (first few years) | Mostly index funds, plus a few small stock positions |
Regular stock picker with a tested process | 10 to 20 individual stocks |
Experienced investor with deep expertise and time | Possibly fewer than 10, in businesses that pass all five criteria |
The rest of this article explains the reasoning, so you can decide which row honestly describes you.
The Honest Case for Index Funds
For most people, the right number of individual stocks is zero. That is not a failure. It is a sensible choice.
Warren Buffett has said this more than once. In his 1993 letter to Berkshire Hathaway shareholders, he wrote that by periodically investing in an index fund, "the know-nothing investor can actually out-perform most investment professionals." In his 1996 letter, he added that most investors will find the best way to own stocks is through an index fund with minimal fees.
Benjamin Graham made a similar distinction long before index funds existed. In The Intelligent Investor, he separated the "defensive investor," who wants reasonable results with little effort, from the "enterprising investor," who is willing to do serious analytical work. He advised the defensive investor to hold a diversified list of large, conservatively financed companies, suggesting a minimum of about ten and a maximum of about thirty.
If you are not going to read annual reports, check returns on capital and follow the businesses you own, an index fund gives you broad diversification cheaply. Individual stock picking only makes sense if you are willing to do the work.
What Diversification Actually Does
Diversification reduces company-specific risk: the chance that one business collapses because of fraud, a failed product or bad management. It does not remove market risk, the chance that most stocks fall together in a crash.
Diminishing returns
Early academic research in the late 1960s, such as a well-known study by Evans and Archer (1968), suggested that most of the reduction in company-specific volatility comes from the first ten or so stocks. Later research, including work by Campbell, Lettau, Malkiel and Xu (2001), found that individual stocks had become more volatile, so more holdings were needed to achieve the same smoothing.
The exact number depends on the period and the measure. The shape is consistent: each extra stock reduces volatility a little less than the one before. Going from one stock to ten makes a big difference. Going from 40 to 50 makes very little.
Diversification is about independent risks
What matters is not the number of ticker symbols but the number of independent risks. Owning ten banks is closer to one big bet on the banking system than to ten separate bets. A portfolio of 12 businesses in different industries, with different customers and different economic drivers, can be better diversified than one with 25 stocks in the same sector.
Why Concentration Can Drive Outsized Returns
The great investors who beat the market over long periods often held fairly concentrated portfolios. The arithmetic shows why.
Worked example: the ten-bagger
Imagine you find a business whose shares rise tenfold over several years.
Position size at purchase | Effect on the whole portfolio |
1% (a 100-stock portfolio) | +9% |
5% (a 20-stock portfolio) | +45% |
7% (roughly a 15-stock portfolio) | +63% |
Same insight, same research, very different result. In a very broad portfolio, even your best ideas barely move the total.
Buffett explained the logic in his 1993 letter. He argued that a policy of portfolio concentration may well decrease risk if it raises both the intensity with which an investor thinks about a business and the comfort level they must feel with its economics before buying. In other words, owning fewer businesses forces you to know each one far better.
Charlie Munger went further and often criticised wide diversification, arguing that a few great businesses, well understood, beat a long list of mediocre ones.
The other side of the coin
Concentration cuts both ways. A 20% position that falls to zero costs you 20% of your portfolio. A 1% position that falls to zero costs you 1%.
That is why concentration only works under specific conditions:
You have a genuine research edge in the businesses you own.
You have the time to follow them closely.
The businesses are high quality, with durable moats and sound balance sheets.
You bought them with a margin of safety.
You have the temperament to hold through large price swings.
If any of these is missing, concentration is simply a bigger bet, not a better one.
The Problem With Blind Diversification
The opposite mistake is also common: owning dozens of stocks you do not really understand and believing that makes you safe.
Peter Lynch coined the word "diworsification" in One Up on Wall Street to describe companies that wasted money buying businesses outside their expertise. The same idea applies to portfolios. Every stock you add beyond what you can follow is likely to be a weaker idea than the ones you already own. It dilutes your best thinking while adding little real protection.
Blind diversification creates three problems:
You cannot monitor your holdings. When something important changes at a company, you will not notice until the price has already moved.
You hold weaker ideas. Your 40th best idea is almost always worse than your 5th.
You pay fees for an index. A long list of stocks bought with little conviction tends to behave like the market, after costs and effort.
Buffett is often quoted as saying diversification is protection against ignorance. The logical conclusion is not that diversification is bad. It is that diversification works as a substitute for deep knowledge. If you have the knowledge, you need less of it. If you do not, you need more of it, ideally through an index fund.
Three Factors That Set Your Number
1. Your research capacity
Each stock you own needs regular attention: annual reports, quarterly results, news about competitors and management. An individual investor with a full-time job can realistically follow perhaps 10 to 20 companies well. Beyond that, most people start owning businesses they no longer genuinely track.
2. Your supply of great ideas
Your number should be driven by how many businesses pass all five criteria at a reasonable price, not by a target you feel you should hit. If you have 12 genuinely strong ideas, own 12. Do not add a 13th just to reach a round number.
3. Your temperament
In an equally weighted portfolio of 10 stocks, a single 30% fall costs you about 3%. In a portfolio of 5, it costs about 6%. In a portfolio of 20, about 1.5%. Choose a level of concentration you could hold through the worst year you can imagine. A portfolio you abandon in a panic is worse than a more diversified one you stick with.
Worked Example: Building a Portfolio
Consider a hypothetical investor, Sam. Sam has a full-time job and has been using the Five Criteria for three years.
Sam keeps a core index fund for part of the savings and runs a stock portfolio alongside it.
After screening and research, 14 businesses pass all five criteria at acceptable prices.
They come from eight different industries, so no single economic shock hits more than a few of them.
Sam gives the strongest ideas, with the widest margins of safety, starting positions of about 8%, and smaller starting positions to the rest. No position is started above 10%.
That gives Sam enough concentration for good research to matter, enough breadth to survive being wrong about two or three companies, and a workload Sam can realistically manage. Our guide on position sizing explains how to set those weights.
How We Use This in the Five Criteria
The Gingernomics house guidance is:
Most stock pickers: hold 10 to 20 positions, spread across industries with different economic drivers.
Beginners: keep most of your money in index funds while you learn, and start with a handful of small positions.
Concentrate only in businesses that pass all five criteria: great business, durable moat, aligned management, sound balance sheet and reasonable price.
Never let one mistake sink you: size every position so that being completely wrong is survivable.
The Five Criteria make concentration safer because they filter out the businesses most likely to cause permanent losses: those with poor returns, no moat, weak management, heavy debt or excessive prices. Without that filter, concentration is just risk.
Common Mistakes
Owning too many stocks to follow. If you cannot remember why you own something, you own too many.
Owning too few without the skill to back it. Copying a famous investor's concentration without their experience is a recipe for large losses.
Counting tickers, not risks. Five tech stocks that all depend on the same trend are one bet.
Filling slots with weak ideas. A target number should never lower your standards.
Ignoring index funds. For many investors, a cheap index fund is the smartest portfolio available.
Frequently Asked Questions
Is 10 stocks enough diversification? For an investor who knows those businesses well, 10 high-quality stocks across different industries can be reasonable. It still carries more company-specific risk than a broad index, so each business should pass all five criteria and no position should be oversized.
Is it bad to own too many stocks? It can be. Beyond what you can follow, extra stocks usually add weaker ideas and little extra protection. Past a certain point, you are running an expensive index fund.
Should beginners own individual stocks at all? They can, but carefully. Keep most of your savings in a low-cost index fund while you learn, and start with small positions in businesses you understand.
How many stocks did Warren Buffett recommend? Buffett has recommended index funds for most investors. For those who genuinely understand businesses, he has argued that a concentrated portfolio can make sense because it forces deeper thinking about each holding.
Your Next Step
Learn how to weight each holding in position sizing as the ultimate edge.
Revisit the foundations of risk in what is investment risk.
Build your pipeline of ideas with a stock watchlist.
About the author: Cameron Hayes is a senior investor relations and finance professional who has worked in IR at Nasdaq Copenhagen-listed companies including Nilfisk and Maersk Drilling. He holds an MSc from Copenhagen Business School and a BCom from the University of Ottawa, and founded Gingernomics to teach individual investors the Five Criteria framework. More about Gingernomics.
The content on Gingernomics is for educational and informational purposes only and does not constitute financial advice. Always do your own research and consult a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.
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