My long distance cousin, Anna (not her real name) said to me earlier during Chinese New Year. We were talking about investing when I told her how many stocks we need to own.

She said:

Over the last 16 years, I learned one simple truth about investing: it’s ok to have a larger number of stocks in your portfolio. I know, a portfolio with many stocks looks messy. And no one likes a messy portfolio with many stocks (yeah... that sinking feeling in your stomach).

The goal is not to build a portfolio that looks "perfect" on paper. The goal is to make sure the portfolio is bullet-proof, produces reliable income, survives market cycles and allows you to sleep soundly at night.

Not many will follow this but I’ll still say: we have to get comfortable with a messy portfolio.

Now, don’t get the wrong idea that you need to watch all your stocks like a hawk every single day. You don’t have to do that. Because your initial research does most of the heavy lifting. After all, a dividend investor accumulates into high-quality businesses that produce predictable profits. Before I accumulate shares in a company, I ask myself:

Do these businesses have a durable competitive advantage? Am I buying the stock at a sensible price? Has the company been paying growing dividends each year?

First, applying this investing framework would have already removed more than 95% of the stocks in the market from your radar. They simply don’t qualify.

Next, this would dramatically reduce the amount of work required to watch over your portfolio.

How many stocks are worth owning?

Here's your free lunch. According to research, once a stock portfolio reaches ~30 stocks, your portfolio’s risk would have been reduced by 58%. Of course, adding more stocks beyond that doesn’t reduce risk very much.

But owning too few stocks makes a portfolio dangerously weak. I learnt this the hard way when I was a fixed income analyst dealing with the oil & gas defaults, Hyflux, corporate frauds and so on. Companies can deteriorate suddenly.

So, don’t be so sure. Don’t be so sure.

Warren Buffett owns at least 40 stocks in Berkshire Hathaway. This excludes the private businesses he owns. And Berkshire Hathaway is a trillion dollar investment company. Not convinced? Peter Lynch who ran the US$18 billion Magellan Fund between 1970-1990s, averaged a 29% annual returns had more than 1,000 individual stock positions.

Successful investors understand the power of risk control through diversification. Because let’s face it: You only make money once you protect your downside.

As far as investing is concerned, you don’t need to own hundreds of stocks to invest safely. One of my personal portfolios I share regularly with my Diligence Wealth Club is diversified with ~40 stocks.

Does it look messy? Yes. Is it too many stocks? No. My portfolios don’t have to look pretty. What matters is it accumulates wealth...

What I’m really trying to say is don’t listen to all the talk that says you should just focus on three or four stocks. In fact, having ten stocks in your portfolio is a lot better than just three big ones. Actually, what is best is to have around 30 stocks in your portfolio. I assure you having this approach will go a long way in keeping you surviving – no, thriving – in the stock market.

That doesn’t mean you have to go buy all the stocks today.. But having a diversified portfolio as an end goal is a great way to get started investing.

One last thing: One evening, after I gave a seminar on investing, a gray-haired man walked up to me. He told me all his stocks in his portfolio were losing money. I asked:

He told me he owned just five stocks in his portfolio. And all five had high dividend yield. He thought he could retire on them.

But what he didn’t know was that some of these stocks’ underlying businesses began to weaken, giving him big problems – falling revenues, declining earnings and cash flows. Eventually, shares kept falling, dividends got cut.

That left an impression on me.

By the way, if you want to build a long-lasting dividend portfolio, I wrote a quick-start guide.​

Willie Keng, CFA

Founder, dividendtitan.com

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