Frequently Asked Questions

Frequently Asked Questions – Account Management

About How Many Stocks Can I Expect My Personal Portfolio To Hold?

Although it will depend a great deal on the allocation strategy you choose, you may see a larger number of positions in your portfolio than you would expect. That's because each of our strategies is designed and run as an individual "sleeve" of a portfolio. As a result, each strategy (e.g., Dividend, Small/Mid-Cap, Fixed Income, etc.) is managed as its own unique component. Our portfolio managers aim to diversify the holdings in each separate strategy as completely as their investment approach will allow. When one or more of these sleeves are combined in a blended Personal Portfolio, the number of overall holdings will, of necessity, increase to allow more complete global market exposure.

The idea that an investor can capture all the benefits of diversification with just a small handful of stocks is a common one and has had numerous proponents over the years (e.g., Ben Graham in The Intelligent Investor; Burton Malkiel in A Random Walk Down Wall Street, etc.). However, most academic studies have focused on volatility, or how far the portfolio's actual returns vary from the average return as a measure of risk. The greater the portfolio volatility, the higher the risk.

However, Motley Fool Wealth Management believes volatility is an incomplete measure of portfolio risk, since it is possible to have a portfolio with a low volatility that still produces sub-par returns or fails to meet your investment goals. Newer studies ("Equity Portfolio Diversification: How Many Stocks are Enough? Evidence from Five Developed Markets," by Alexeev and Tapon, November 2014) indicate that the ideal number of stocks needed to reduce the vast majority of diversifiable risk is upwards of 50, and perhaps even higher during times of market distress. There is still healthy debate surrounding this subject, but evidence from more recent market environments seems to point toward a larger number of holdings as optimal for diversification purposes.

So while we can create a fairly well-diversified stand-alone Personal Portfolio for you (e.g., Dividend, Large Cap Core, Large Cap Aggressive Growth, or Hedged Equity), to reap the full benefits of a complete portfolio that includes exposure to all of the major asset classes (large-cap, small/mid-cap, international, fixed income), we recommend incorporating a blended Personal Portfolio into your financial plan. However, if you prefer to make the asset allocation decision on your own, one of our large-cap strategies can be an important part of your overall asset mix.

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