What is the optimum number of stocks to have in a portfolio?

What is the optimum number of stocks to have in a portfolio? For many years, this has been one of the questions I kept asking myself whenever I look at our dividend portfolio. 

As of the time of writing, we have 49 holdings in our dividend portfolio – 48 dividend-paying stocks and 1 index ETF. The 48 dividend stocks consist of 17 US dividend stocks and 31 Canadian dividend stocks. For diversification reasons, we hold one index ETF, the iShares ex-Canada global index ETF. 

I have mentioned that we probably hold too many individual stocks. Ideally, we’d like to hold between 35 to 40. Therefore, one of my goals for this year is to reduce the number of holdings from 49 to 45. 

But am I just having this goal for the sake of having fewer stocks in our portfolio? Do we gain any benefits from having fewer stocks in our portfolio? Is there an optimum number of stocks to have in one’s portfolio? These are all important questions, the answers to which will hopefully appear in the following article. 

How many stocks should I have in my portfolio?

Contrary to popular belief, there’s no rule on the number of stocks you should hold in your portfolio. Experts typically recommend holding a minimum of 20 stocks in an investment portfolio for diversification purposes. 

Why 20? Because if you do an equal weight distribution, that means each stock holding will make up 5% of your investment portfolio. At 5% per stock, it gives you enough exposure to each stock but not large enough for one stock to cause big swings (i.e. volatility or beta) in the value of your overall portfolio. 

For example, if your portfolio is $20,000 and you hold 20 stocks, that means each stock has a starting value of $1,000. If the share price of one stock drops by 50% due to bad news or a poor quarter, this will only result in a 2.5% hit or a $500 drop in your overall portfolio value (assuming the other 19 stocks’ share prices stay the same). Such a 50% share price drop would have a much bigger impact if you hold fewer stocks in your portfolio. 

Some people may argue, why not make it simple, hold ten stocks, and call it a day? In this scenario, each stock would make up 10% of your investment portfolio (again assuming an equal weight distribution). The performance of each stock would have a bigger impact on your portfolio value.

The biggest issue with holding only 10 stocks is that your portfolio may be more concentrated to a specific sector, resulting in under-diversification. 

For example, if you hold 10 stocks in your portfolio and you decide to hold Royal Bank, TD, Brookfield Asset Management, Sun Life, and Manulife as five of the ten stocks, you’d have 50% of your portfolio exposed to the Canadian financial sector. 

If the financial sector suddenly experienced a major downturn due to inflation, interest rates, or indeed, anything, your portfolio would suffer a MAJOR hit… remember the financial crisis? 

So holding 10 stocks in your portfolio is not ideal

On the other hand, what about holding 50 individual stocks in your portfolio? That means each stock would make up 2% of your portfolio, assuming an equal weight distribution.

Holding 50 individual stocks typically reduces overall risks and results in higher diversification. But the flip side is that it may be difficult to manage your investments. It may take more time to monitor your investment and understand how each stock is doing. 

Furthermore, for an individual to really understand the inner workings and movements of 50 stocks is usually quite difficult. For that, you’ll probably need a dedicated team. I’ll be the first to admit that we don’t follow the quarterly results for every single stock we own. 

If you’re not using a commission-free broker like Wealthsimple, managing a stock portfolio with more than 50 stocks can cause your transaction costs to add up quickly, especially if you’re switching in and out of your investment holdings. 

Again, not ideal. 

What about dividend ETFs and index ETFs?

Out of curiosity, I wanted to see how many individual holdings some of the popular dividend ETFs and index ETFs hold. I also wanted to see how much exposure the respective ETF has to the top 10 and top 20 holdings. 

Here’s the data: 

ETF Ticker	Total of holdings	Top 10 holdings %	Top 20 holdings %
VDY	47	70.85%	92.34%
ZDV	52	44.81%	70.98%
XDV	30	54.14%	83.57%
PDC	44	60.59%	88.84%
DGRC	53	48.59%	76.29%
VCN	182	37.49%	55.77%
XEQT	9,390	12.59%	18.53%
XAW	9,172	14.61%	19.60%

Dividend ETFs like VDY, ZDV, and DGRC, hold between 30 to 55 holdings (rounded up). For all of them, the top 10 portfolio holdings make up more than 50% of the respective ETF. 

To my surprise, for VDY, the top 20 holdings make up over 92% of the ETF, meaning the rest of the 27 holdings only make up 8% of the ETF. That’s definitely a high exposure to the top 20 holdings.

This trend, however, is observed for all of these dividend ETFs. The top 20 portfolio holdings make up at least 70% of the respective ETF. Therefore, the other holdings really aren’t providing all that much diversification in these dividend ETFs. 

The Vanguard Canadian All Cap Index ETF, VCN, holds 182 different stocks. Despite holding 182 different stocks, the top 10 holdings still make up over 35% of the portfolio and the top 20 holdings make up over 55% of the portfolio. If VCN uses an equal weight distribution for its holdings, the top 10 holdings should make up about 5.49% of its portfolio and the top 20 holdings should make up about 10.99% of its portfolio. In other words, just like the dividend ETFs, VCN is heavily exposed to its top 20 holdings. 

This shouldn’t be a surprise though, since you probably want to have a higher exposure to solid and profitable companies like Royal Bank, TD, Canadian National Railway, and Waste Connections and have a lower exposure to a lesser known stock like Osisko Gold Royalties Ltd. 

Both XEQT and XAW can be considered as outliers as the top 10 and top 20 holdings only make up a small percentage of the portfolio. However, if we consider equal weight distribution again, the top 10 holdings for XEQT should make up 0.11% of the portfolio and the top 20 holdings should make up 0.21% of the portfolio. 

Still, given both XEQT and XAW hold more than 9,000 stocks, I’d say both ETFs are very well diversified. 

What does all this tell me? 

Well, for these eight ETFs mentioned above, despite holding many different individual stocks, many of them are concentrated on the top 20 holdings. That’s just the way these ETFs were set up. In fact, only a few index ETFs are set up using an equal weight distribution for the underlying holdings. 

This begs the important question… Do you really get that much diversification by holding more than 50 stocks? 

Probably not. 

So, in my humble opinion, the diversification benefits start to reduce quickly once you go above 20 stocks. For each stock you add over this magic number of 20, you probably won’t see too much further diversification, especially if these stop 20 stocks make up a large percentage of your portfolio.

Our investment portfolio 

In case you don’t know, our investment portfolio consists of three parts: 

• Dividend portfolio, which makes up about ~90% of our investment portfolio. 
• Growth portfolio, which makes up about 4% of our investment portfolio. 
• My work’s RRSP portfolio, which makes up about 6% of our investment portfolio. 

Since this blog is about reaching financial independence via dividend investing, I spend a lot of time writing about our dividend portfolio here. 

The growth portfolio makes up a relatively small portion of our investment portfolio. I see money in the growth portfolio as “play” money. This money allows us to invest in higher risk, non- dividend paying companies like Tesla, Alphabet, Amazon, etc. Since we are limiting our exposure to these higher risk stocks, if we happen to take a big loss, it sucks, but we won’t lose sleep over it. 

Since my work does RRSP contribution matching, I do not say no to free money. For my work’s RRSP portfolio, I invest in low MER index mutual funds because we don’t have choices investing in index ETFs.

If we look at our dividend portfolio, the top 10 holdings account for about 52% of our portfolio value while the top 20 holdings account for around 76% of our portfolio. To put things in perspective, on average, each of our top 10 holdings accounts for about 5.2% of our dividend portfolio and each of the next 10 holdings (11th to 20th) accounts for about 2.4% of our dividend portfolio.

Essentially, we have high exposure to these top 20 holdings (note: XAW is one of the top 5 holdings). This is a similar setup to many dividend ETFs. 

The other 30 holdings only account for about 24% of our portfolio or on average roughly 0.8% per each holding. So the performance of these 30 holdings usually won’t move the needle all that much. 

My view about our investment portfolio? If we went from 49 individual stock holdings to 45, it won’t make too much of a difference if the four positions we close out are part of the bottom 30 holdings. 

To make a significant difference, we would have to close out four positions in one of our top 20 holdings. At this point, it’s probably unlikely that would happen because we wouldn’t want to get out of stocks like Apple, Manulife, Royal Bank, or Johnson & Johnson. 

The sweet spot – between 20 and 50 stocks 

So what is the optimum number of stocks to have in a portfolio? I believe the sweet spot is somewhere between 20 and 50 stocks. I don’t think there’s an exact number though. It will totally depend on who you are as an investor. 

For those investors that like to check their portfolio regularly, they are probably better off holding around 20 stocks so they don’t have to spend too much time monitoring these stocks. 

On the other hand, for investors who leave their investments on autopilot, not doing transactions regularly, and check their portfolio infrequently, there’s probably no harm in having around 50 stocks. 

Summary – What is the optimum number of stocks to have in a portfolio 

I started this post wanting to answer the “what is the optimum number of stocks to have” question for myself. 

Turns out, I learned something by writing this post. 

What did I learn? 

I learned that when I set up my goal of reducing the number of individual stocks from 49 to 45, I wasn’t really considering the overall diversification impact on these smaller holdings. At the end of the day, there’s probably not much difference between 49 individual dividend stocks versus 45. 

It is far more important for us to make sure our top 20 holdings will continue to do the following:

• Being highly profitable and generating strong revenues every quarter
• Pay regular dividends and raise dividend payout each year
• Making sure these companies continue to have wide moats and continue to stay in their respective field of expertise. 

Furthermore, to reduce the amount of time involved in monitoring these stocks, we want to enroll in DRIP whenever possible so we can put these investments on auto-pilot, DRIP additional shares, and take advantage of dollar cost average. 

Again, I believe the sweet spot for a DIY investment portfolio is somewhere between 20 and 50 stocks. That number can change depending on whether you own index ETFs or not (Note: I do recommend doing a hybrid investing approach by holding both individual stocks and index ETFs for better diversification). That number can also change based on what kind of investor you are.

Furthermore, the number will depend on whether your broker charges trading commissions and if your broker does, how much these commissions cost and the dollar amount you typically trade at.

The key here is not to get overwhelmed by the number of stocks you hold. If you begin to get this feeling or are losing sleep over how many stocks you hold, it’s probably time to trim down your holdings.