How many ASX shares should you have in your portfolio?
It’s a tricky question, to be sure! That’s partly because everyone has a different answer. Some people are happy with 4, others have more than 40.
Some experts will tell you to have as many as you can for diversification’s sake, others like Warren Buffett will tell you that “diversification is protection against ignorance. It makes little sense if you know what you are doing.”
So what is one to do?
What does diversification bring to a portfolio?
Diversification is a term bandied around a little much these days, in my opinion. But the basic idea is that diversification helps you reduce risk. The more companies, industries, and even countries you are invested across, the less likely a significant event in any one of these will derail your returns.
Take the recent shocks we’ve seen in the oil markets as an example. If someone just had Woodside Petroleum Limited (ASX: WPL), Beach Energy Ltd (ASX: BPT) and Caltex Australia Limited (ASX: CTX) in their portfolio, they would have been smashed by the descent of oil prices into negative territory. Having shares outside the oil sector would have helped insulate this portfolio considerably.
Of course, if you diversify too much, you will just end up with a return similar to what a broad market index fund will give you.
How many shares are enough?
Keeping all this in mind, having a share portfolio of 15 shares would be ideal (in my opinion), but anywhere between 10-20 is probably the right balance for most investors.
But just having 15 isn’t enough. If you had 15 oil companies or 15 banks, it wouldn’t be a diversified portfolio at all.
So a further caveat: having 15 companies could be considered ideal, but so is making sure this stable covers a broad swathe of at least the Australian economy is also important.
And if you still feel your portfolio is still too concentrated, you can easily bump up your diversification with an exchange-traded fund (ETF) or two.
But don’t let an arbitrary share limit dictate how you choose to invest if you don’t wish. There’s nothing wrong with owning one company just like Warren Buffett (provided you know it inside out). Equally, there’s nothing wrong with owning 40 if it helps you sleep better at night. Investing is a personal journey and one that you have to do your own way!
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Scott Phillips.