How Many Stocks and Funds You Need

Diversification seekers always want to know what the optimal number of investments is. They want to have enough holdings to moderate the volatility of their portfolios. But they don't want too many holdings, because they think they're diluting their possible returns and overcomplicating their investing lives.

The magic number for stocks

When it comes to stocks, various studies have suggested that you can build an adequately diversified equity portfolio with 15 to 30 stocks. In his 1930s classic The Intelligent Investor, Benjamin Graham said that the magic number was somewhere between 10 and 30 names. In the late 1960s, John Evans and Stephen Archer concluded that 10 stocks were enough. And in the 1970s, Burton Malkiel said 20 stocks will do in A Random Walk Down Wall Street.

Take that number with a grain of salt

Don't let these numbers mislead you, though. For starters, most of these "how many stocks" stories assume random investing—and investing is anything but random, unless you're the type who chooses investments by throwing darts at stock tables. We all have our own investment styles. For example, an aggressive investor may end up with a portfolio that skews toward growth stocks, or someone in the health-care industry may end up with a heavy weighting in that sector. Their portfolios, while diversified across many names, may not be as diffuse as they look.

Perhaps more important, some studies, including one by Malkiel himself, show that the volatility of stocks has risen over the past few decades. As a result, the number of stocks you need to mute volatility likely is far greater than 15.

How many funds you "need"

How many mutual funds do you need to have a diverse-enough portfolio? The answer is—you guessed it—it depends. Some funds, such as target-date funds, can deliver a lot of diversification in one package, providing exposure to stocks and bonds as well as U.S. and foreign securities. Investors can arguably obtain adequate diversification by buying a single target-date fund and calling it a day.

But not everyone wins

Meanwhile, an investor could build a 10-fund portfolio and still not achieve adequate diversification, assuming all the funds focused on a similar part of the market. That may sound farfetched, but it was actually the case in the late 1990s, when many investors amassed multi-fund portfolios with a strong bias toward growth stocks, especially technology names. Seven large-growth funds simply won't diversify a portfolio the same way owning one large-blend fund and one small-value fund and one small-growth fund would.