Understanding the Optimal Number of Stocks for Your Portfolio with Scott Tominaga

Scott Tominaga on Determining the Ideal Number of Stocks for Your Portfolio

Diversifying your investment portfolio is a key strategy in effectively managing and mitigating financial risks. By distributing your investments across various asset classes, industries, and geographic regions, you establish a safety net that shields your wealth from market fluctuations.

According to Scott Tominaga, this approach not only protects your investments but also lays the groundwork for a more secure and resilient financial future.

Beyond just diversifying within companies, industries, and regions, a well-structured portfolio aims to create a strong foundation that grows consistently in value over time. Such portfolios tend to exhibit lower volatility, ensuring steady growth even during challenging market conditions.

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The real strength of diversified portfolios lies in their ability to offset setbacks caused by individual stock performance or localized economic downturns.

While diversifying your investment portfolio is advisable, having a large number of individual stocks in your possession comes with certain drawbacks. Apart from the potential burden of high trading fees, the task of researching and selecting each stock might not be appealing.

Opting for shares in an exchange-traded fund (ETF), which offers a diverse range of stocks in a single investment, can provide immediate diversification. Numerous ETFs contain a myriad of stocks in their holdings.

What is the ideal number of stocks to have in your portfolio?

Diversifying your stock portfolio with 20 to 30 stocks is essential for managing risk and preventing overexposure to a single company. While owning more stocks boosts diversification, having an excessive number can be impractical.

The key is to diversify while comprehending the reasoning behind each investment. For investors adopting a market-wide strategy, the optimal number of individual stocks is often zero due to the increased volatility they introduce.

If you opt for stock selection, ensure you possess an adequate number to prevent excessive concentration in any one company or industry. Scott Tominaga emphasizes that diversification should always be a fundamental element of your investment approach, regardless of your portfolio size.

Remember, by spreading your investments across different assets, sectors, and regions, you can reduce the impact of any one investment’s poor performance on your overall portfolio returns, ultimately enhancing your investment resilience and long-term growth potential.

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Is it more beneficial to expand current stock holdings or opt for diversification?

The optimal choice depends on various factors such as your investment time horizon, risk tolerance, current portfolio diversification, and tax status. If your stock holdings lack diversification, buying new stocks is likely the best approach.

If you’re augmenting a diversified portfolio, you can increase your investment in each existing stock by the same amount, enhance your exposure to your preferred stocks in the portfolio, and further diversify by acquiring additional stocks. There isn’t a definitive superior option. Scott Tominaga says expanding your holdings can be a sound decision if you can effectively manage a broader portfolio.

Scott Tominaga earned his degree in Business Finance from Arizona State University in 1988. An experienced professional in the hedge fund and financial services industry, his skills involve expertise in middle and back-office accounting, compliance, and administrative functions within financial services firms. For more articles on finance and investment, visit this blog. 

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