Building a sensible portfolio: How many stocks are enough? Explained
When I look at individual investors’ stock portfolios, I usually see two extremes. On one side is the “all or nothing” investor who has poured most of their money into just two or three favourite stocks. On the other side is the collector who owns forty, fifty, sometimes even seventy stocks, many of them in tiny, almost invisible quantities.Both of these approaches create problems.If you are concentrated in just a handful of names, one bad event can do serious damage to your wealth. If you own fifty stocks, you’ve effectively created your own private index fund—but without the discipline or diversification of a professionally managed one. In both cases, your portfolio is not performing as it should.A sensible stock portfolio lives somewhere in the middle. At Value Research Stock Advisor, when we think about how a subscriber should own stocks, we always come back to three simple questions: how many stocks do you really need, how big should each position be, and how do you sensibly spread your exposure across sectors?Let me give you an example. I recently saw a portfolio with more than 100 different stocks. The single largest holding, Reliance Industries, accounted for almost 30 per cent of the investor’s equity allocation. At the same time, there were more than 80 stocks with weights below 1 per cent each. In other words, one stock could determine the portfolio’s fate, while a long tail of tiny positions added complexity with little real impact. This is exactly the pattern you want to avoid.So what is a reasonable range? Research and common sense both tell us that, beyond a certain point, adding more stocks does not reduce risk in any meaningful way. It merely adds clutter. For most individual investors, a good working range is roughly between 10 and 20 stocks in total. Within that, you should have at least 5-7 core positions that actually matter, and very few—ideally zero—“leftover” positions that are less than one per cent of your equity portfolio.Below, say, ten stocks, your portfolio becomes quite concentrated. That can work, but it demands great analytical skill and a strong stomach for volatility. Above, say, twenty-five or thirty stocks, each holding becomes so small that even if one of them does very well, it barely moves your overall result. You are tracking a lot, but nothing really counts. When we build our recommended list in VRSA, we don’t expect anyone to buy everything on the menu. We expect them to create a focused personal portfolio within this reasonable range.Position sizing is the next layer. It’s not enough to know that you own fifteen stocks; what matters is how your money is distributed among them. This is where many portfolios quietly go off track. In the portfolio I just mentioned, Reliance Industries was at 30 per cent, while holdings like Nestle and HUL were languishing at around 0.5-1 per cent each. If Nestle doubled, it would barely change the total portfolio. If Reliance Industries fell by thirty per cent, it would hurt badly.A more useful way to think about position size is to decide your normal stake in a solid idea—let’s say between 5 and 8 per cent of your equity portfolio—and also choose a hard upper limit per stock, perhaps 10-12 per cent. Smaller “starter” positions can make sense if you have a clear plan to either build them up or exit them after some time. The key is to avoid mindlessly collecting a trail of tiny, forgotten bets. In our own thinking at VRSA, a stock only becomes a serious recommendation if we believe it deserves a meaningful place in a portfolio, not a token half-percent “let’s see how it goes” allocation.Sector diversification is the third part of the story. If you own fifteen stocks and all of them are in one or two closely linked sectors, you are not really diversified. You are making a large thematic bet, whether you realise it or not. You don’t have to micro-manage sector weights like a mutual fund manager. Still, you do need to avoid extremes, such as more than around 30-35 per cent of your stock portfolio in a single sector, or large clusters of companies that will all get hit by the same type of shock—interest rates, regulation, commodity prices and so on.Here, too, a concrete example helps. Imagine a portfolio where 5 out of 15 holdings are in IT, accounting for about 50 per cent of the stock allocation. On paper, it looks like a diversified list of names: Infosys, TCS, HCL, Tech Mahindra, and Wipro. In reality, it is one big sector bet on the same theme. If sentiment turns against that pocket of the market, almost half the portfolio is affected at once.A simpler way to handle this is to look at your portfolio on paper and ask yourself whether it has a reasonable mix. Do you have financials, consumer names, industrial or manufacturing exposure, a technology or services component, and so on? Or have you unconsciously created a portfolio that is effectively just a real estate bet, or just a small PSU bank bet, or just a micro-cap chemicals bet? When we add or evaluate ideas at VRSA, we are not only thinking, “Is this stock good?” We are also thinking, “What else might an investor reasonably hold, and how would this fit into the bigger picture?”There is one more piece that many people forget: your stock portfolio does not live in isolation. If you also own mutual funds—and most people should—then your sector exposure is already spread out through those funds. You don’t need your stock picks to “cover everything” again. You can use direct stocks more selectively, for businesses where you have extra conviction or where you genuinely want higher-than-average exposure.This is exactly how we think when we combine VRSA with our fund recommendations. The mutual funds form the broad, diversified core. The direct stocks are the more focused satellite. The role of the satellite is not to become a second, messy core; it is to sharpen the overall portfolio in a few chosen areas.If you already have a set of stocks, it can be useful to do a quick health check. Count how many names you own and see if it’s well over 25-30. Add up the value of your top five holdings and know whether they make up at least 40-50 per cent of your stock portfolio. Look at any single sector and see whether it dominates more than roughly 30-35 per cent. And finally, count how many holdings are so small that they’re under one per cent of your equity allocation. Each of these is a signal. If you see too many tiny positions and one or two oversized bets, you know where the imbalance lies.The good news is that none of this is complicated. You don’t need a complex model to fix it. You need to prune the long tail of meaningless positions, be honest about which businesses you genuinely believe in, and put sensible limits on how much you will put into any one stock or sector.You don’t get rewarded for owning the maximum number of stocks. You get rewarded for owning a reasonable number of good businesses, in meaningful but controlled sizes, across a sensible spread of sectors, on top of a well-built mutual fund core. That is essentially the philosophy behind how we think about portfolios at Value Research Stock Advisor. And it’s an approach you can adopt on your own, using nothing more than a sheet of paper, an honest eye and a willingness to simplify.(Ashish Menon is a Chartered Accountant and a senior equity analyst in Value Research’s Stock Advisor service.)
