How Many Stocks Should I Own?

Charles Schaap

Optimum portfolio performance begins with deciding how to allocate capital into a number of different stock positions. The total number of stocks will depend upon the trader's objectives, experience, investment capital, and amount of time that will be devoted to trade management.

In reality, the number of stocks owned will vary with portfolio performance and market conditions. However, assuming that the market is in a strong uptrend and portfolio capital is fully allocated, here are my guidelines:

Up to $25,00: 2-5 stocks
$25,000 to $50,000: 5-8 stocks
$50,000 to $100,000: 8-10 stocks
Over $100,000: 10-12 stocks

Managing more than 10 stock positions can become difficult unless you are very experienced. It is easier to lose focus with too many stocks to manage. In addition, 10 positions may seem manageable when the market is going up, but a trader can get overwhelmed with management decisions during a market correction; this can lead to stress and mismanagement resulting in unnecessary losses.

With the ProTrend strategy, less emphasis is placed on the number of stocks owned, and more attention is given to how the stocks in the portfolio are performing. The portfolio is a feedback mechanism, telling the trader when things are going well or poorly.

Generally, it is better to be invested in fewer, strongly performing stocks than in a higher number of stocks with mixed results. To actively manage the portfolio, a trader will want to shift capital from the weakest performers to the strongest performers in the portfolio.

Naturally, the number of stocks in the portfolio should be limited (or decreased) when stocks are performing poorly; the number of stocks can be increased when the stocks are performing well.

It is easier to manage stocks when the market is strong, but management becomes more difficult when a stock shows signs of weakness. It is especially hard when a stock is a loser, an the trader must decide whether to sell it and take a loss or wait and hope that it recovers. Waiting could lead to an even bigger loss should the stock decline further.

If the market is in danger of slipping into a correction, traders will typically sell some stocks to capture profits and minimize downside risk. It is better to stay ahead of a potential correction because the market moves faster to the downside. By the time a correction is called (meets criteria), traders may have already lost hard-earned profits.

If a correction begins, traders may get stopped out of a couple positions. They should generally refrain from adding new positions, since most stocks follow the direction of the market. During a correction, the only stocks left in the portfolio, if any, should be the ones which have a big profit cushion.

When the market recovers from a correction, new positions can be added to the portfolio as setups appear and breakouts occur. During this time, the number of positions in the portfolio will quickly increase. It is recommended that traders enter stocks soon after the correction ends, since this is when the lowest risk setups occur and where upside gains can be maximized.

The main emphasis of portfolio building should not be placed on a "fixed" number of stocks in a portfolio. Rather, the number should change according to portfolio performance and market conditions. Ultimately, the number of stock positions is up to the individual trader, based on trading style, experience, investment goals, and trade management skills.

Important Disclaimer:

The information presented in the ProSelect Stock Report is for informational purposes. The information was based on data and charting programs from independent services and CC Trader LLC d/b/a TradeLikeaPro does not guarantee the accuracy of the information used in the analysis of securities presented. The information is not offered as a guide for trading ideas and setups. Investors and traders should conduct their own independent research before making any investment. Nothing contained herein should be construed as an automatic recommendation to buy or sell any listed security. Investing and trading involves risk. Before deciding on any investment, you should consider your investment objectives, level of experience, and risk tolerance. Do not trade with money you cannot afford to lose. You should seek investment advice from a professional investment adviser before engaging in investment activities.

Traders should check numbers for accuracy before relying on them for trading decisions because typographical errors will sometimes occur.

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