If people investing really don't feel that comfortable with individual stocks, then it makes no sense to invest such a small portion in them. For a lot of people, they'd do much better by just investing in an index fund and skipping mutual funds or individual stocks. Mutual funds just flat-out stink against the S&P 500 in the long run and most people don't have the time to analyze and follow individual stocks. I'm not trying to scare you away from individual stocks or anything, but it is the truth that people who know nothing about what they're doing still buy individual stocks. Let's talk about diversification.
There is no right amount of stocks to own. The comfort level should absolutely be the main and first priority of every investor out there. Only invest in what you're very comfortable and confident with, otherwise it makes no sense. I'm not comfortable with an array of industries, so I stay away from them. Simple as that. Forcing yourself to diversify among industries is a terrible idea unless you're comfortable and confident with it. The cutoff point for how many stocks you own should be the amount of stocks you can follow pretty closely going forward. Once you get into the territory of not really following all your stocks on a fairly consistent basis, that's a good sign you might have a bit too many. Generally I'd limit the amount of stocks you own to the amount that you can comfortably follow on a fairly consistent basis (such as checking each company every 3-6 months or something along those lines). You must be able to follow the business, because a stock will not do well in the long haul unless the business does well. As such, it is important to follow the business at least some of the time.
Index funds are great tools for those who want exposure to stocks but don't have the time to get involved with individual stocks. There is no such thing as "true diversification." It's all about what you're comfortable with. People have done well with owning a few stocks, some have done great owning hundreds and even thousands of stocks. It all comes down to the comfort level and what you're comfortable and confident with. I have around 20 stocks today and as long as I see a good business that is poised to outperform the market, I'm not going to stop adding to my portfolio and investing in new businesses.
I think people don't really realize that there isn't one good amount of stocks to own, everyone has their own style, their own comfort level, and their own areas of interest. Take me for instance. I'm not invested in any Chinese business, even with the tremendous economic growth we've seen there lately and tremendous popularity the stock market there has. This is simply because I'm not comfortable with the government, country, or any of the companies there (Ctrip is the only Chinese business that interests me at this point). Lots of people these days are investing in China, but I'm not because I'm not comfortable with it one bit. People need to realize that investing in stocks isn't a treacherous, dangerous, and nearly impossible thing to do. I feel very comfortable with my portfolio even though I have a large portion invested in food businesses and restaurants. Invest in what you understand, feel comfortable with, and have confidence in, and you should get a good idea of how many stocks you can own. If you're always investing in companies you don't really research (many people do), then extreme diversification for them is unfortunately what seems like the best option. Buying more of something you're not comfortable with is a dumb idea and shouldn't be done.
Tags:
china, comfort level, diversification, index funds, mutual funds
Posted at: 07:41 AM | Add Comment
| 
| 
del.icio.us