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Question: How many ASX shares should I buy?

Diversification repr

I often get asked the question: Should I sell my Commonwealth Bank of Australia (ASX: CBA) shares?

To which I reply: “I’m not sure. I can’t give you personal advice but how many shares do you own?”

“I dunno. I think I inherited about a 1,000 or so. So, like $70,000.”

“Wow, that’s not what I meant. How many different shares do you own? How many companies?”

“I don’t understand the question.”

“Do you own just Commbank shares? Or others, like National Australia Bank Ltd. (ASX: NAB) and BHP Billiton Ltd (ASX: BHP) shares?”

“No, just CBA shares.”

“Gotcha. We’ve got work to do.”

How many ASX shares should I buy?

Unfortunately, most people who inherit shares have no idea that holding just a few can be very risky. Of course, companies like Commbank won’t disappear overnight.

But the concept of “diversification” is very important, especially for beginners. 

If you think about it like a house or apartment it’s easier to explain. Imagine you buy two investment properties in the same, bushfire prone suburb. If a bushfire comes along 100% of your investments are wiped out.

But if you bought just one property in the bushfire-prone suburb and another property in a suburb far away, your risk of ‘bushfire’ is cut in half (50%). The good thing about it is that you lower your risk but still have the same investment potential. 

The same concept applies to shares.

Ultimately, academic studies have shown that after about 30 diverse investments the benefit of diversification wears out. So some stock professionals say that for new investors it is a ‘race to 30 stocks’.

However, studies have also shown that 70% of the benefit from diversification can be captured with just 10 diverse shares. Therefore, some investors opt for a more ‘concentrated’ portfolio of just 10-20 shares.

Personally, I don’t have the intellectual capacity to deal with 30 investments. Heck, even 20 is pushing it.

To me, it makes sense to add more money to your 10th, 11th, 12th…or even 15th best idea before you add a 30th position.

Therefore, I believe about 20 investments is enough.

Of course, if you have only $500 to invest it may take time to build up to a suitable number of shares.

Foolish Takeaway

Between 20 to 30 investments is the commonly accepted number amongst professionals. However, it’s important that you consider diversifying your stock market investments across industries, sectors, sizes and geographies. For example, investing more than 30% of your portfolio just in bank shares might be too much risk, in my view.

Where to invest $1,000 right now

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Motley Fool contributor Owen Raszkiewicz has no position in any of the stocks mentioned. You can follow Owen on Twitter @OwenRask.

The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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