How many companies should I have in my portfolio?

No magic number can be the answer to this question, and it will always depend on the goals we have for our portfolios. In that case, we can distinguish between the following two portfolios:

Concentrated portfolio

Concentrated portfolios tend to hold around 10 stocks. For diversification and regulatory reasons, most investment funds available cannot have such few companies. In any case, Hedge Funds are free to invest without these restrictions, but they are only available for professional investors.

Common Portfolio

They tend to have among 20-40 holdings. This makeup most of the accessible investment funds in the market. This quantity of stocks is high enough to mitigate non-systematic risk (individual risk of each company, diversifiable) but low enough to be able to differentiate itself from the benchmark.

Gráfico de Ibbotson Associates

La clave: la correlación entre activos

The aim is to have a wallet whereby assets are barely related among them, but with positive expected returns.

This does not occur in the stock market, where correlation is high among stocks, especially in bear markets.

As a result, if we already hold a portfolio with 20 stocks, even if we added more securities, it would not translate into any additional advantage in terms of diversification: diversification is marginally decreasing as seen in the graph.

Conclusión: conocerse como inversor es la solución

If our idea is to differentiate ourselves from the market, we should go for a concentrated wallet. On the contrary, if we have a lot of investment ideas but low conviction in each of them, we should aim for a broader wallet. Here, each investor should be aware of the risk that is willing to assume to stand out from the crowd.

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