You’ve good list of stocks that have strong fundamentals and fit all the rules of what makes a good investment and now you are ready to hand over your cash.
But which one do you buy? One of them, all of them?
Obviously how many different stocks you buy will depend on how much money that you have to invest. Some people start out with just a few thousand dollars and others come into a nice windfall and want to invest that.
It really doesn’t matter how much you start with. I actually started with $1,000 when I first began investing (although I now recommend that people start with much more because with $1,000 you can usually only buy into one company which can be a risky strategy).
Buying more than one company means that even if one doesn’t work out the others can cover your losses so that you don’t lose everything. It lowers your risk.
But on the flip side, you can over-diversify and hold too many companies as well. Then your returns are diminished to just average and you never really make any great gains. Generally most people that buy stocks directly don’t have that problem though (it’s usually mutual funds that hold hundreds of different companies that happens too).
So How Many Companies Should You Buy?
As a minimum I suggest you buy into three different companies minimum and six as a maximum. I usually don’t like to hold more than six since it can be difficult to keep track of them all (and it can dilute your profits), so between three and six is my sweet spot.
If you feel you can handle it then by all means go for more, that’s just a suggestion by me not a requirement. I’ve actually held up to ten companies at one time, but I just found it too much bother to keep track of. I kept forgetting what I actually held with that many! The news financial reports would come on and a stock would rise and I’d have to think if I still owned it or not before I could break out the champagne.
So if you think you’d like to keep the number you hold to a minimum as well, but still enough to lower your risk somewhat by diversifying here is a rough guide as to how many to hold depending on how much money you have to invest:
$6,000 – 3 different companies @ $2,000 each
$10,000 – 3 different companies @ $3,300 each
$20,000 – 4 different companies @ $5,000 each
$30,000 – 5 different companies @ $6,000 each
$50,000 – 6 different companies @ $8,300 each
$100,000 – 6 different companies @ $16,600 each
What mix of companies to buy?
I like to buy companies that meet different needs so I can mix it up even more.
The first way to do this is to choose companies from different sectors. What often happens in the stock market is that one sector does particular well at one time pulling all of the stocks within that sector up with it.
But the sector that’s doing the best changes often. For that reason I like to make sure the three, four, five or six companies that I hold are from different sectors.
The second thing I always make sure to include is some high dividend stocks. I particularly like dividend stocks for three reasons. One is that you get income no matter what the market is doing (which is why investors love them in down markets), two is that it’s been proven that high dividend stocks (especially if you re-invest those dividends back into the company) generally make more profits for investors that regular stocks. And three most high yield dividends pay rates far higher than most savings accounts meaning that even if your money doesn’t increase in value you still make a high ‘interest’ rate on your money.
You could choose all dividend stocks, or just a few. But definitely make sure you include at least one in your mix to buy.