How much stock shall I own for investment?
By using analogy, it is a bad idea to put all eggs in one basket, as when the basket falls, all the eggs will break literally. Even so, we can’t put the eggs in too many baskets as well, because it takes too much energy to manage them. Thus, the question that occur in every investor’s mind is how much is the number of stocks one shall hold in the share market investment?
Pros on having large number of shares :
- Diversification, reduce the risk factor considerably
- Easier and better price in share purchase or sell, without having to push up or bring down the share price with large quantity of shares
- Peace of mind and better sleep at night with less tension, after knowing any company stumbled wouldn’t affect the entire portfolio
- Avoid fear and greed trading as the volatility of each share doesn’t affect our daily mood
- Yield higher and stable return in overall in long time horizon
Cons of having large number of shares :
- Brokerage fee will be higher if the value traded is less than RM5,000, as normally a broker firm charge minimum brokerage of RM8 to RM28
- Returns will be lower if a second priority or a less favorable stock is chosen
- Require a lot of attention, time and efforts to monitor over time
- No double or triple return in short period as risk-return is lowered tremendously
According to the rule of thumb, in our opinion, the number of stocks to hold depends on your percentage invested in share market to your overall portfolio. Our assets and wealth (portfolio) mainly consist of bank saving, fixed deposit, unit trust, real estate, SSPN saving, PRS and investment in stock market. Therefore, the first thing you have to calculate is “What is the percentage you are going to allocate for stock purchase in share market”. For example, if your KWSP saving is RM150k, property value (deduct bank loan) RM150k, bank saving 30k, SSPN and PRS 20k, and your stock investment RM150k. Your total portfolio is RM500k, thus the ratio of stock investment is 30%.
We recommend that each stock constitutes 2% of the total portfolio; hence the best number of stocks to purchase is 15. You have to purchase more stock if your ratio allocation is higher and vice versa. The rationale behind this technique is to concentrate earning more money from normal job if your proportion is low. Spend more time for research and monitoring in stock trading if your allocation is high in total portfolio. We can bear higher risk if our investment allocation in overall portfolio is low.
Keep in mind that the flat 2% is just a suggestion, which you can adjust it from a range fix of 1% to 3%, depending on your risk tolerance, monthly income, expectation and investment objective.