A diversified portfolio should have a broad mix of investments. For years, many financial advisors recommended building a 60/40 portfolio, allocating 60% of capital to stocks and 40% to fixed-income investments such as bonds. Meanwhile, others have argued for more stock exposure, especially for younger investors.
Some experts say that somewhere between 20 and 30 stocks is the sweet spot for manageability and diversification for most portfolios of individual stocks. But if you look beyond that, other research has pegged the magic number at 60 stocks.
Commonly cited rules of thumb suggest subtracting your age from 100 or 110 to determine what portion of your portfolio should be dedicated to stock investments. For example, if you're 30, these rules suggest 70% to 80% of your portfolio allocated to stocks, leaving 20% to 30% of your portfolio for bond investments.
First, determine the appropriate asset allocation for your investment goals and risk tolerance. Second, pick the individual assets for your portfolio. Third, monitor the diversification of your portfolio, checking to see how weightings have changed.
The 100% equity prescription is still problematic because although stocks may outperform bonds and cash in the long run, you could go nearly broke in the short run.
A good range for how many stocks to own is 15 to 20. You can keep adding to your holdings and also invest in other types of assets such as bonds, REITs, and ETFs. The key is to conduct the necessary research on each investment to make sure you know what you are buying and why.
Income Portfolio: 70% to 100% in bonds. Balanced Portfolio: 40% to 60% in stocks. Growth Portfolio: 70% to 100% in stocks. For long-term retirement investors, a growth portfolio is generally recommended.
Expectations for return from the stock market
Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market.
Determine Your Initial Investment
It is possible to start a thriving portfolio with an initial investment of just $1,000, followed by monthly contributions of as little as $100. There are many ways to obtain an initial sum you plan to put toward investments.
To build a diversified portfolio, you should look for investments—stocks, bonds, cash, or others—whose returns haven't historically moved in the same direction and to the same degree.
A good way of allocation is to subtract your age from 100 – this should be the percentage of stocks in your portfolio. For example, a 30-year-old could keep 70% in stocks with 30% in bonds. On the other hand, a 60-year-old should reduce risk exposure, hence, the stock to bond allocation should be 40:60.
The old rule about the best portfolio balance by age is that you should hold the percentage of stocks in your portfolio that is equal to 100 minus your age. So a 30-year-old investor should hold 70% of their portfolio in stocks.
For example, if you have $10,000 to invest, you might consider owning between 30 and 50 stocks. This would give you a diversified portfolio that would provide some protection against losses in any one particular stock. It would also allow you to participate in the growth of several different companies.
Assuming a deduction rate of 5%, savings of $240,000 would be required to pull out $1,000 per month: $240,000 savings x 5% = $12,000 per year or $1,000 per month.
The median value of stocks directly held by American families in 2019 was $25,000, a few thousand dollars below the median value recorded before the 2008 recession and the peak value recorded in 2013. Data source: Federal Reserve (2020).
A good return on investment is generally considered to be about 7% per year. This is the barometer that investors often use based off the historical average return of the S&P 500 after adjusting for inflation.
The “60/40 portfolio” has long been revered as a trusty guidepost for a moderate risk investor—a 60% allocation to equities with the intention of providing capital appreciation and a 40% allocation to fixed income to potentially offer income and risk mitigation.
If you're 70, you should keep 30% of your portfolio in stocks. However, with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age.
For example, Portfolio A which has an asset allocation of 75% equities, 15% fixed income, and 10% commodities would be considered quite aggressive, since 85% of the portfolio is weighted to equities and commodities.
If you only have $100,000, it is not likely you will be able to live off interest by itself. Even with a well-diversified portfolio and minimal living expenses, this amount is not high enough to provide for most people.
Most experts tell beginners that if you're going to invest in individual stocks, you should ultimately try to have at least 10 to 15 different stocks in your portfolio to properly diversify your holdings.