I’ve received one question from other investors maybe more than any other question. That question is this: How many stocks should I own in my portfolio?
It’s a great question. Unfortunately, there’s no “right” or “wrong” answer that applies to everyone.
However, there is a right or a wrong answer depending on what kind of investor you are and what your goals are. And that’s exactly what I want to talk about today.
I’m going to tell you why I’m broadly diversified and own more than 100 different stocks in my personal stock portfolio.
Now, this doesn’t make 100 or more stocks the right number for you. But I hope that sharing this information gives you some context to work with in determining your own proper level of diversification.
Ready? Let’s dig in.
First, let me start by saying I believe in broad diversification within a stock portfolio. This belief is based on who I am as an investor and my goals as an investor.
I’m a dividend growth investor whose investing goal all along was to achieve financial independence and retire by 40 years old by living off of safe, growing passive dividend income.
With that in mind, broad diversification makes a ton sense. There’s very little cost. Yet a ton of benefit. Let’s imagine you’re living off of dividend income right now. Do you want all of your passive income to be dependent on just one, two, or even 10 companies?
If you own an evenly concentrated portfolio of 10 companies and one of them has to eliminate their dividend, you’re out 10% of your income.
How would you feel if 10% of your income just disappeared overnight? Probably not great, especially since I can guarantee you that 10% of your bills aren’t going to just go away. Those bills are only going up.
If you own an evenly diversified portfolio of 100 companies and one of them has to eliminate their dividend, you’re out only 1% of your income.
That’s a massive difference. In this case, it would take 10 dividend eliminations by 10 different companies to put you in the same situation as the investor with a heavily concentrated portfolio and only one cut. There’s simply a much larger margin of safety here. And if you’re investing in high-quality dividend growth stocks, the odds of experiencing 10 different dividend eliminations all in one go are highly unlikely. This is amazing portfolio and income defense.
Diversification gets even better. You also get offense.
That’s because even if you do experience an unfavorable dividend outcome or two in a portfolio of 100 stocks, you’ve got 98 or 99 other high-quality dividend growth stocks offensively increasing their dividends. That means a cut or two barely even shows up on the radar, because the portfolio is so busy ballasting itself with dozens of other dividend increases. Before you know it, you’re already back ahead of the game.
I’d know. My portfolio ran through the pandemic-induced crash last March. And guess what?
The income took a small licking, but overall kept on ticking – and then some. There was a small, temporary drop in income production from the portfolio as some dividend eliminations from even blue-chip stalwarts like Walt Disney (DIS) – rocked the boat. All the same, though, dozens of other dividend increases from incredibly reliable businesses like Johnson & Johnson (JNJ) – more than made up for it, quickly putting me ahead of the game and righting the ship. It was smooth sailing in what could have been very rocky waters had I went into that storm with a very concentrated portfolio.
It’s not like it costs more money to diversify. Trades are free. Also, a lot of people seem to think that running a large portfolio is difficult or time consuming. Well, that’s just not true. I don’t need to babysit world-class enterprises like Johnson & Johnson. They don’t need input from little ol’ Jason Fieber, right? Besides, that’s why I invest in high-quality businesses – so that they can make me money while I go about living my life. The more of this, the merrier.
Furthermore, technology makes managing a broadly diversified portfolio easier than ever.
I routinely get emails and notifications with summaries of news events, dividend declarations, and earnings results. It literally only takes minutes per day to check on relevant items. Yet I sleep like a baby for eight hours every night, which is priceless. I’ll gladly exchange a few minutes per day for hours of easy rest, especially since I actually enjoy keeping abreast of business news. It’s a hobby that actually pays me, unlike most hobbies that cost a ton of money.
That said, diversification isn’t cost-free.
Every cost-benefit analysis has both costs and benefits. Nothing in this world is without trade-offs. In this case, you risk losing out on some outperformance relative to a benchmark. All the same, though, diversification reduces the risk of underperformance relative to a benchmark. And besides, is some extra potential money at the end of your life worth all of the potential headaches and losses that heavy concentration can result in?
Think of this way.
Have you ever heard of a heavily concentrated portfolio manager blowing up? Of course. Ever heard of an investor managing a broadly diversified portfolio of high-quality, blue-chip dividend growth stocks blowing up? Highly doubt it.
It’s just a lower-risk way to approach long-term investing.
And since stocks are inherently risky and volatile, being broadly diversified is, to me, a prudent way to approach things over the long run. This is especially true if, like me, your aim is to live off of the growing dividend income your portfolio produces for you.
The last thing I’d want to do is to have to go back to my old day job because my dividend income dried up.
And if your goal is to achieve financial independence and even potentially retire early, I’d strongly consider being broadly diversified within your own portfolio. Once you pull the trigger on quitting the job in favor of living off of passive income, you’d better be sure that income is extremely reliable and can withstand any storm that comes its way. Because I can tell you from experience, bills are very reliable and will keep coming no matter how hard it’s raining outside.
Even with well over 100 stocks in my own portfolio, I can easily rattle off another 100 amazing businesses that I don’t yet own a slice of. There are thousands of publicly-traded companies out there. I mean, the S&P 500 index, which is the market and kind of the gold standard these days, has 500 stocks in it.
Each stock in my portfolio is like a golden goose laying ever-more golden eggs.
Why only have a gaggle of 10 or 20 geese when there are hundreds of golden geese out there all too happy to lay a growing pile of golden eggs for you? Why not reduce your single-stock exposure and lower your risk of permanent capital and/or income loss? I can’t answer those questions very well, so I’ve chosen to build a very large gaggle of some of the very best golden geese in the world. You might want to consider doing the same.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
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