Weekend Reading – How many stocks are enough?

Weekend Reading – How many stocks are enough?

Welcome to some new Weekend Reading material – the how many stocks are enough edition. 

Before sharing some of my favourite finds and articles from the personal finance and investing blogosphere this week, here are some of my recent articles just in case you missed them:

These are the six key phases you need to work through to achieve financial independence.

I believe financial independence really boils down to two major things:

1. Save and increase your savings rate for investing over time, and
2. Invest your money wisely.

That’s it.

On that note, I posted my June 2022 dividend income update here – something I’ll work on over the weekend, tally my update for July, and update you next week! (Spoiler alert: the result will be higher than $27,212! Yay!)

June 2022 Dividend Income Update

In this Weekend Reading edition, I shared a link to a free FI calculator – to show you how your savings rate (when it increases over time) can a be signifcant enabler to wealth-building and therefore financial independence.

How many stocks are enough?

Thousands!

Kidding, but only partially.

What I mean by thousands is that for many investors, owning thousands of stocks from around the world can certainly help simplify your stock selection process AND fuel your financial independence dreams at the same time. We wrote about as much this week at Cashflows & Portfolios when we covered the Best ETFs to Own to Build Wealth.

With any all-in-one ETF (Exchange Traded Fund), you can:

  1. Eliminate the need for manual fund/asset rebalancing. Simply buy and hold the ETF, and buy and hold some more over time!
  2. These ETFs have your personal investing risk tolerance already designed in.
  3. Such ETFs are already globally diversified, including a small portion of Canadian content.

There are many all-in-one fund providers (Vanguard Canada, iShares Canada, and Bank of Montreal tend to lead the pack of offerings) but there are other fund providers as well.

However, many investors like myself prefer a bit more of a hands-on approach to the portfolio construction. 

Almost 15 years ago now, I devised my “hybrid investing” approach and announced that approach on this site via my monthly dividend income updates to take advantage of what I saw was the best of both worlds:

  1. Use some individual stock selection, companies that have (and continue) to reward investors like me via dividends, increasing dividends, AND capital gains over time, and
  2. Follow some passive investing, owning low-cost, broad market ETFs to ride the coattails of market returns beyond any stock selection processing or worry whatsoever. 

So, what’s the answer: how many stocks are enough?

You might have learned or read already that diversification is the only “free lunch” investors really have. As such, some dividend investors may feel they are in a pickle – feeling they need to add more stocks to help decrease portfolio volatility. The outcome of this adding exercise should be that portfolio volatility should decrease and the relative risk for each stock held in the portfolio will diminish – to a point.

Before we unpack this a bit more, here is what some experts have mentioned about how many stocks are enough:

Lowell Miller author of The Single Best Investment:

“In our portfolios for individuals and institutions we tend to carry thirty to forty stocks.”

“The more stocks you have, the more your group will behave like an index.”

“If you don’t want to hold the thirty to forty stocks that satisfy my personal comfort level, you can reduce the number – bearing in mind that each reduction increases the risk that a single bad apple in your bushel will have an excessive impact on results.”

Gary Kaminsky author of Smarter Than The Street:

Holding 100 stocks is yet another myth of the great Wall Street marketing machine.”

“If you’re going to do your own work/research, you should feel comfortable that with 25 to 30 names, you have enough diversification and you have enough skin in the game.”

Gail Bebee author of No Hype – The Straight Goods on Investing Your Money:

“A popular rule of thumb asserts than an individual stock should represent no more than 5% of a portfolio. This would mean owning at least 20 stocks.”

“Some studies of past stock market performance have concluded that owning about 15 to 20 stocks provides the best return for the least risk.”

Stephen Jarislowsky, Canadian billionaire and author of The Investment Zoo:

“Out of the many thousands of stocks I can choose from worldwide, I therefore really only need to look at 50 at most.”

Beyond these experts, you are probably familiar with the name Peter Lynch. Lynch was popularized for running Fidelity’s Magellan Fund – a fund that earned a whopping annualized return of 29% during his 13 years running it, more than twice what the S&P 500 over the same period. 

During his tenure as manager of the Magellan Fund, I read Lynch held as many as 1,400 stocks at some point. But that wasn’t the secret to his success. Rather, it was a blend of good timing, a sound philosophy, and sticking to favourable characteristics. Some of those points are included below:

Lynch on investing philosophy, style and stock consideration characteristics:

  • Consider investments and their “competitive environment”.
  • Select companies with “which you are familiar and have an understanding of the factors that will move the stock price”. Specific factors may depend on the firm’s “story,” but these factors can include:
    • Year-by-year (upward) earnings.
    • The company balance sheet should be strong.
    • Look for a low dividend payout ratio (earnings per share divided by dividends per share) and long records (20 to 30 years) of regularly raising dividends.
  • Select companies whereby “the name is boring, the product or service is in a boring area…”
  • The company is a niche firm controlling a market segment (e.g., railroads).
  • The company produces a product that people tend to keep buying during good times and bad.
  • The company can take advantages of technological advances, but is not a direct producer of technology.
  • The company is buying back shares.

Lynch:

There’s no use diversifying into unknown companies just for the sake of diversity. A foolish diversity is the hobgoblin of small investors. That said, it isn’t safe to own just one stock, because in spite of your best efforts, the one you choose might be the victim of unforeseen circumstances. In small portfolios, I’d be comfortable owning between three and ten stocks.

So, while index investing is great, and I’m all for it for some investors, I have a bias to my hybrid investing approach and I’ve found my sweet spot is aligned to Stephen Jarislowsky as an individual stock selector for ample diversification, index investing beyond Canada for assurance, meaning:

“I therefore really only need to look at 50 at most.”

How many stocks are enough summary

Over time, while at the time of this post I have owned over 40 individual stocks from Canada and the U.S. for income and growth, I’m now closer to my sweet spot of 25-30 individual names for ever growing dividend income – I just index invest the rest of my portfolio for growth beyond that. 🙂

For dividend investors, diversification can be a serious issue that needs to be reckoned with.

Always remember with investing: 

“it is all too often true that the same things that maximize your chances of getting rich also maximize your chances of getting poor.”  – Financial historian, celebrated author and neurologist William Bernstein.

Here are my tips for any investor in Canada seeking some individual stocks to buy and hold, and hold some more. 

Step 1. As part of any initial, beginner portfolio construction, consider indexing or using ETFs first then diversify into individual stocks over time – aim to invest initially into four or five or six stocks – maybe one per sector at a time. You can read up about that approach from this book:

Benefits of The 6-Pack Portfolio

Step 2. When thinking about Canadian sectors to invest in, consider “TULF” stocks.

86-year-old Gordon Pape had some advice for investors recently in The Globe and Mail about how to protect your portfolio in these wild and wonderful market times…(subscribers only). I would argue “TULF” stocks are for any investing time and for the long-haul!!

His advice:

“Dividends are reflections of a company’s success. Organizations that raise their payout on a regular basis are telling us they are doing well now and are confident about their future. Sustainable dividends also help to support a stock in a falling market.”

Pape highlighted the common sectors and stocks to consider for your DIY dividend stock portfolio:

  • Banks – the usual Big-6 suspects.
  • Utilities – FTS, CPX, EMA, among others.
  • Telcos – the usual Big-3.
  • Pipelines – the usual Big-3.
  • REITs – various could apply but Pape favours CAR.UN and GRT.UN in particular.

Beyond Pape’s standard list, I would also identify a few low-yielding, growth-oriented stocks to consider for your portfolio. That will be the “L” in “TULF” stocks that should be the foundation of any good DIY stock portfolio – in Canada at least.

What is TULF?

  • “T” for telecommunication companies (think Bell, Telus and Rogers).
  • “U” for utilities (think Fortis, Emera, Capital Power, Algonquin Power, Brookfield Renewable Partners, and others)
  • “L” for low-yielding dividend growth stocks with growth potential (think Canadian National Railway, Waste Connections, Nutrien, Metro, Alimentation Couche-Tard, Brookfield Asset Management, and others), and last but not least everyone’s sector favourite in Canada for dividends,
  • “F” for financials (you know the names).

Buy these companies over time, over months, over years, over decades. Eventually, the portfolio will do all the income and returns work for you! 

Beating the TSX (BTSX) is one approach you might wish to adopt, a highly successful approach at that, that typically lists telcos, utilities and financials (T, U, F) from the “TULF” list.

How to Beat the TSX 2022 Stocks

List of BTSX 2022 stocks courtesy of Dividend Strategy.

Step 3. Watch your diversification and stock weights over time – monitor – buy and hold and add some more!

As you know, portfolio diversification is the process of making sure you balance your investments so they are not tied to one industry, geographic area, or investment type. This means your stock proportions should depend on your objectives and the risks you can accept. Personally, I avoid having too many banks or utilities dominate my portfolio. I also know that market leaders and laggards both deserve a place in my portfolio – it’s impossible to know which one and when either will play leapfrog.

Ultimately, I think anything beyond a portfolio of 40-50 stocks will be both too time consuming and add minimal alpha (if any) to your portfolio. Any more stocks than this range, and you’re likely to dilute even your best choices to grow your personal wealth.

More Weekend Reading…

A BIG thank you to TD and the team at TD Direct Investing for allowing me to share my journey, details of my portfolio, and more, including navigating inflation recently! 

I’ll share more links with you when I get them!TD Direct Investing - Mark Seed July 27, 2022

Outstanding post and highlights from our passionate Canadian dividend investor community by Vibrant Dreamer you really shouldn’t miss!

From Of Dollars and Data:

“After examining our current crash and the crash of March 2020, I discovered a striking similarity in how stocks declined on their way to the bottom. Of course, our current crash may not have found the bottom yet, but based on the data I’m about to show you, I’m hopeful it has.”

Read on: Why This Crash is Worse Than 2020 (and Why It Might Be Over Soon)

Robb Engen from Boomer & Echo wrote about some mental accounting.

Dale Roberts wrote about building (or maintaining) his retirement stock portfolio on Seeking Alpha.

Dividend Growth Investor recently shared 26 Dividend Champions to consider for further investment research.

Have a great weekend!

Mark

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

26 Responses to "Weekend Reading – How many stocks are enough?"

  1. Hi Mark. I’ve just started reading your blog over the past few months, and I’m loving it. Thanks so much for sharing your knowledge and journey!

    I have a question about investing in the US market with ETFs in an RRSP. I’m wondering if it’s worth the hassle to purchase something like VOO which requires a currency conversion using Norbert’s Gambit, or if you’d just stick with a CDN listed ETF like VFV that doesn’t require the conversion?

    The amount would be about 50k to start, and with some selling of other stocks likely 500k within 10 years. I know the MER is lower with the US listed ETFs, and there is no withholding tax in RRSPs with US listed ETFs, I’m just wondering from your perspective if buying the US ETF is worth the extra work, and what you’ve done in your own RRSP.

    Thanks for any input, it’s very much appreciated!

    Byron

    Reply
    1. Thanks, Bryon! 🙂

      Congrats on DIY investing. You’ll be likely wealthier for it vs. paying a high-priced advisor!

      “I have a question about investing in the US market with ETFs in an RRSP. I’m wondering if it’s worth the hassle to purchase something like VOO which requires a currency conversion using Norbert’s Gambit, or if you’d just stick with a CDN listed ETF like VFV that doesn’t require the conversion?”

      I started slowly building part of RRSP and LIRA with some CDN ETFs to be honest, years ago, but really switched to/focused on VTI and QQQ a few years ago along with my U.S. stocks for extra diversification.
      https://www.myownadvisor.ca/lessons-learned-in-diversification/

      I don’t mind the currency (in U.S. $$) and minor Gambit work every few years, since fees are lower, no withholding, slightly better very long-term returns, etc. inside RRSP.

      https://ca.finance.yahoo.com/news/vun-vs-vti-canadians-buy-160000639.html

      That said, unless you want to Gambit – you aren’t missing that much and to be honest, I know investors who have hundreds of thousands of dollars in just CDN listed ETFs like VFV, VUN, etc. for their portfolios.

      I think once you have >$100k or so inside your RRSP, then owning U.S. stocks and U.S. ETFs inside your USD $ RRSP or LIRA makes more sense but the difference is only incremental and it really depends on your holding period; i.e., hold VTI, etc. for longer than 10 or 15 years, you’ll be ahead.

      Hope that helps!!
      Mark

      Reply
  2. Hi Mark
    I have been reading and enjoying your blog for the better part of this year and would like to thank you for all the work you put into it making sure that the information is easy to understand and is backed up by sound research.
    We are in pretty good shape financially but realize that how we currently have our investments allocated is not the most tax efficient. Currently all of our investments in our TFSA’s are dividend payers and represent 40% of our portfolio. Given the increased rate in GIC’s we currently have 10% in 1 year GIC’s that mature in 2023 that will be taxed as income. The remaining 50 % is sitting in cash which is currently earning a special rate at Tangerine of 3% until November. I know it’s crazy to have this much cash not working for us however as seniors we’re a bit hesitant to put the balance into stocks from the BTSX and Tangerine is now offering 4.5% on a 1 year term GIC. I’ve thought about swapping out the investments from the TFSA’s into a nonregistered account and having GIC’s only in the TFSAs to save on the tax but maybe I’m overthinking this too much? Any thoughts?

    Reply
    1. Scott, thanks for the kind words – always very nice to hear from readers and passionate DIY investors 🙂

      Quickly, for tax efficiency I like the following:
      1. CDN stocks in taxable for the CDN dividend tax credit and/or stocks for capital gains.
      2. CDN stocks or CDN listed ETFs in TFSA.
      3. US stocks or US listed ETFs in RRSP/RRIF and LIRA, etc.

      Reference beyond me 🙂
      https://www.moneysense.ca/save/investing/asset-location-everything-in-its-place/

      Back to you….

      Honestly, I like a cash wedge as a buffer against stocks in my portfolio. Meaning, even though most of my assets are dividend paying stocks that increase their dividends – see huge example below today (!) – I see HUGE benefits in keeping a year or so in cash, or a 1-year GIC guaranteed eventually, in case the stock market shut down for a year. I could still cover all my expenses 🙂

      So, you could keep a bit of cash inside your RRSP, TFSA, taxable or all the above!

      I think for us, I will keep my 1-years’ worth of cash between my corporation and taxable higher interest savings account. This way, very liquid.

      Most folks/retirees I know are considering some cash + 1-year GIC at higher rates now. All good!

      See this post for some ideas.
      https://www.myownadvisor.ca/the-cash-wedge-managing-market-volatility/

      Because my withdrawal order in retirement is slow RRSP/RRIF withdrawals long before TFSAs, I prefer to have my RRSP/RRIF with mostly if not all equities for dividend income and compounding. My cash is liquid in savings, on demand, if and when I need it.

      Not advice, no requirement to do that, but just how I work 🙂

      Thoughts?

      Maybe I should author a post about the best place to keep cash? 🙂

      Let me know!
      Mark

      Reply
      1. Thanks Mark
        Great information and the links you included were on point. A post about the best place to keep cash would be great. We already keep a cash wedge on hand for emergencies etc., and will likely utilize 1 year GIC’s to keep our options open. At this point in time, I think it’s hard to argue against a guaranteed 4.5% return with a full ‘sleep factor’ in place.
        We have been winding down my wife’s RIF which will be wrapped up by the time she turns 65. At that time we will consider if collecting OAS at 65 is prudent. Health considerations factor into the decision for most of us; yes we could wait to collect extra OAS, or take the payments while we’re still healthy. It’s also important to note that OAS payments cease upon death and there is no survivor benefit.
        If my calculations are correct, if my wife started collecting OAS at 65 and invested the max amount ($6000 /year) into a TFSA compounded at 5%, the value of those contributions would rise to approximately $43,000 at age 70 and generate approximately $2200 /year or about $183/month from 70 years of age onward. The $183 plus the current max OAS of $666.83 works out to $849 /month or $57 dollars less per month than the current max OAS payment at age 70 of $906. I know everyone’s situation is different but for us, leaving guaranteed monies on the table seems to be more risky. Have I got this right?

        Reply
        1. Thanks Scott.

          I will try and pen something soon!

          1-year GICs are good of late and likely to get better!

          CPP and OAS offer up health considerations for sure…I would say if ever concerned, take the money sooner. It is what it is.

          “It’s also important to note that OAS payments cease upon death and there is no survivor benefit.”

          Correct, that means if you have any chance to defer anything, either CPP or OAS – defer CPP for the survivorship benefit and higher, inflation-protected income payment over OAS. Most folks I know take OAS at age 65 (as soon as they can) and I don’t blame them 🙂

          Cheers,
          Mark

          Reply
  3. Thank you Mark for this great article!
    I’ve jumped from GIC to Mutual funds and then Couch potato portfolio and ended up with 26 Canadian holdings and I’m not thinking of adding any new ones just to add to existing. I know there’s a lot of debate about the importance or not of total return but to me total return doesn’t mean much because my plan is to live from those dividends and not worried about market fluctuations and selling at the wrong time when the market is acting up , I know you’re supposed to have some cash on the side so you won’t be forced to sell in a down market but the way I see it if those companies are solid and keep paying and increasing their dividends that’s all I need.
    I don’t worry about having each holding at a certain % in fact I’ve got CNR at almost 8% of my portfolio and FTS at about 7% just because I got lucky and bought them at the right time but I’m not planning on trimming those positions because they’re both a stellar companies.

    Reply
    1. Yes, I find as investors get older – they really don’t give a crap about total return in some cases. 🙂

      Their main goal is portfolio income meets or exceeds expenses and secondary is the “sleep at night” factor. Ideally, they want both. Same for me too!

      I prefer a cash wedge but yes, I also know from you and others that as long as those companies you own “keep paying and increasing their dividends” that’s all you need. That’s fair….

      CNR, FTS and others are great income stocks in Canada. I’m happy to own them too and if they inch to 5% or 6% of my portfolio I probably wouldn’t lose any sleep either!

      Hope you’re having a great summer Gus!!
      Mark

      Reply
  4. Very interesting on the how many and what type of stocks to own and the usual income vs hybrid approach.

    Also very interesting that my wife & my approach looks very similar to Gordon Pape’s with the same 5 sectors and similar companies. Here’s our complete list of holdings:
    – banks – RY,TD,BMO,BNS (+ mid-size position in ZWB for the extra income)
    – utils – EMA,FTS,CPX,AQN
    – telcos – BCE,T
    – pipes – PPL,TRP,KEY,ENB
    – REITs – NWH.UN, DIR.UN

    A couple other notes:
    – we don’t like bonds or any fixed income so we are 100% Cdn dividend income/growth stocks.
    – we don’t believe in diversification
    – we don’t really care about total return. It’s all about having the necessary income to more than cover all expenses (which we do with 3x the dividend income we need)
    – we don’t like the low yielders. In fact, we usually sell when the current yield drops below 3%.
    – we don’t care about the current portfolio weight% of any individual stock so never re-balance (our current max is 7.40% and min is 5.15%)
    – we never sell a stock unless something really dramatic changes with the company.

    We definitely don’t follow the “recommended” financial industry recommendations. In fact, I think most of them are a crock. 🙂

    Ciao
    Don

    Reply
    1. I own a bunch of those as well, Don. Happy to do so for the same reasons you do = income and rising dividend income thanks to dividend raises every year or so.

      Those are some good rules you have, including “we never sell a stock unless something really dramatic changes with the company”. Sounds like you have great discipline! 🙂

      Mark

      Reply
    1. Wow, that’a bundle for returns. Will look into XST ETF. 5-year returns between XST and XIU much higher (for XST) from what I see too.
      Thanks,
      Mark

      Reply
  5. Mark, I have also encountered several persons who brag about holding 30+ stocks but I have also noticed many of them can’t keep track of what’s happening as the numbers increase. Of course, the assumption is that these are fundamentally strong stocks and usually should perform well over time. However that’s not always the case, and there’s the rub, the burn, etc.

    Given your portfolio of 25-30 stocks, I would like to know how you approach the traditional portfolio theory of including bonds as a risk hedge? This might also vary across several factors, like age, financial status, market conditions, etc. TIA!

    Reply
    1. Thanks Michael.
      I actually don’t have any bonds in my portfolio at all. Mainly because of this:
      https://www.myownadvisor.ca/got-a-defined-benefit-pension-plan-consider-yourself-lucky-then-consider-it-a-big-bond/

      I will instead keep a cash wedge of 1-years’ worth of cash as I enter into semi-retirement + my 100% equities (stocks and ETFs) + part-time work in a few years. I see bonds actually having lots of risks near-term with inflation and interest rates and when you can get / if you want income security, you can get 1 or 2-year GICs now for 4% – so I just don’t see a long-term compelling argument for bonds.

      https://www.myownadvisor.ca/why-would-anyone-own-bonds-now/

      Thoughts?

      Cheers,
      Mark

      Reply
  6. Thanks for the mention Mark. That is likely one of the most ‘important’ articles I have penned. It’s the all-weather portfolio – all stock edition.

    We protect for any economic environment and for bear markets / recessions.

    I will post the Canadian version soon on my blog.

    At the core, and more than useful is the Canadian dividend payers that we both write about.

    We can then fill in the portfolio holes and make sure our sector weightings have enough of a defensive stance to work as ‘bond replacements’.

    Thanks again,

    Dale @ CTCI

    Reply
    1. Totally Dale re: “At the core, and more than useful is the Canadian dividend payers that we both write about.”

      I feel my hybrid approach has worked very well for me and I will continue to follow it. Don’t fix what isn’t broken 🙂

      Have a great weekend and enjoy Wasaga!
      Mark

      Reply
  7. I’m a hybrid investor as well. 50% in 12 Canadian Dividend Stocks and 50% in ZUQ US High Quality ETF and this ETF has consistently outperformed the S&P 500. I like this for its simplicity and I’m really pleased with the results so far

    Reply
    1. 80 seems like a lot but if you can manage that – all good. I figure 25-30 is in my sweet spot from Canada and the U.S. Everything else is indexed for long-term growth, including some tech booster in QQQ. That should eventually come back 🙂

      Thanks Steve! Continued success to you.
      Mark

      Reply
      1. Hello Mark
        Thanks for the interesting article I follow pretty much the same approach as yourself. But, i have too many stocks. About 45. I would like to get down to thirty but I have many stocks with capital gains, meaning i need to keep them. I am just wondering how you weight your individual stocks? The rule of thumb seems to be that if you have 20 stocks they should weigh in at about5%. I know that is not cast in stone but I like the idea of having 5% of a good company. But how do you weight stocks when you have the not recommended 50 stocks? I like the idea of 5% so all of the high profile and high conviction names weigh in at 5%. Companies like Google and BAM and a few others. Many others I bring up to half weight. Maybe i do this thinking that I will some day get down to 20 stocks. ( just like i keep my old clothes, thinking that I will one day lose weight:). But I am not satisfied with my solution and was wondering about your thoughts on weighting with so many stocks?
        Thanks joe

        Reply
        1. Hey Joe,

          Thanks for your comment! DIY investing is really personal for sure…

          45 could be right for you but I know my sweet spot is a bit lower. Just too much to keep track of.

          I think keeping conviction selections in Google, BAM, others as you have pointed out is just fine, at 5% or so of your portfolio.

          One approach is to slowly sell off some selections you want to get to your 20 or so with.

          Another approach is to simply buy more of your conviction picks and increase the weighting that way.

          I don’t have a specific formula for each weighting, rather, I am fine to have ETFs worth > 5% of my portfolio (e.g., VTI) and I try to keep any one stock to about 5% or so. That’s it. I let the portfolio do the rest of the work by letting dividends become reinvested.

          I’m more concerned about the income my portfolio can generate these days vs. portfolio values or weights since most of my stocks are in the range of 2-4% weights.

          Hope that helps a bit!
          Mark

          Reply

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