Yes, for most individual investors and active managers aiming to select individual stocks to outperform the market, owning 200 stocks is generally considered excessive.
The Principle of Diminishing Returns in Diversification
While diversification is a cornerstone of sound investing, its benefits tend to plateau. Research and practical experience suggest that the majority of diversification benefits are captured once you hold a relatively small number of well-chosen stocks, often around 20 to 30. Beyond this point, adding more stocks contributes negligibly to risk reduction and can even hinder an active investor's ability to achieve superior returns.
When an investor holds a very large number of stocks, such as 200, their portfolio begins to closely resemble a broad market index. This significantly dilutes the impact of any potentially strong individual stock picks, making it extremely challenging to outperform the overall market. The more stocks you hold, especially beyond 100 or 150, the more your portfolio's performance will mirror that of the market, effectively negating the potential upside from extensive research into specific companies.
Challenges of Managing a Large Stock Portfolio
Holding 200 individual stocks presents significant practical hurdles for most investors:
- Intensive Research Burden: Thoroughly researching and understanding the business model, financial health, competitive landscape, and growth prospects of 200 companies is an enormous, time-consuming undertaking. Without adequate research, stock selections are often based on incomplete information or speculation, increasing risk rather than reducing it.
- Ongoing Monitoring Difficulty: The stock market is dynamic, with company news, industry shifts, and economic developments constantly impacting valuations. Keeping track of 200 companies' earnings reports, management changes, product launches, and competitive threats is virtually impossible for an individual, potentially leading to missed red flags or opportunities.
- Dilution of Conviction: A large number of holdings often means that capital is spread thin across many ideas, none of which can receive significant allocation. This dilutes the impact of your highest-conviction ideas, making it harder for them to move the needle on your overall portfolio performance.
- Increased Transaction Costs: While many brokers offer commission-free trading, the cumulative impact of bid-ask spreads and potential capital gains taxes when rebalancing a large portfolio can still add up over time.
When a High Number of Holdings is Normal
It's important to distinguish between actively managing individual stocks and passively investing through funds:
- Passive Investing (ETFs & Mutual Funds): If you invest in broad market index funds or exchange-traded funds (ETFs), you are indirectly holding hundreds or even thousands of underlying stocks. This is a perfectly normal and effective strategy because your goal is to track the market's performance, not to pick individual winners. The research, monitoring, and rebalancing are handled by the fund manager, making it a hands-off approach for the individual investor.
- Institutional Investors: Very large institutional investors, such as pension funds or sovereign wealth funds, may hold a vast number of securities due to their massive capital base and specific mandates. However, even these professional entities often find it challenging to consistently beat the market with such diversified portfolios.
Practical Portfolio Management
For most individual investors, a more focused approach is often recommended.
| Portfolio Size | Active Management Potential | Diversification Benefit | Management Effort |
|---|---|---|---|
| 1-10 Stocks | High (Concentrated Alpha) | Low (Higher Idiosyncratic Risk) | Low |
| 20-30 Stocks | Moderate (Optimal Balance) | High (Significant Diversification) | Moderate |
| 50-100 Stocks | Low (Diluted Alpha) | Very High (Minor Additional Gain) | High |
| 200+ Stocks | Very Low (Index-like) | Maximal (Negligible Marginal Gain) | Very High |
Consider these strategies:
- Quality Over Quantity: Instead of chasing a large number of stocks, focus your efforts on a smaller, manageable number of high-quality companies that you thoroughly understand and have high conviction in.
- Core-Satellite Approach: Many investors utilize a "core-satellite" strategy. A significant portion of their portfolio (the "core") is invested in broad market index funds or ETFs for diversified market exposure. A smaller portion (the "satellite") is then dedicated to a select few individual stocks they actively manage for potential outperformance based on their unique insights.
- Automated Diversification: For broad diversification without the active management burden, low-cost index funds or diversified ETFs (e.g., total stock market ETFs, S&P 500 ETFs) are excellent tools. They provide exposure to hundreds or thousands of stocks automatically.
In conclusion, for an individual seeking to actively pick stocks and outperform the market, 200 stocks is likely far too many. It dilutes the potential for alpha and creates an unmanageable burden. A more focused portfolio, often combined with passive investments for broad market exposure, is generally more effective for long-term investment success.
