How Many Stocks Should You Own?

本站添加: 2026-05-08

[00:00:00]Many people believe that in order to properly diversify their portfolio, they need around 40 to 50 stocks. But, what if I tell you that is not really the case? We diversify to reduce a specific kind of risk called the unsystematic risk. So, before we talk about the numbers, we first need to understand what is unsystematic risk and how many stocks we actually need to minimize it.

[00:00:27]Simply put, the risk of losing money due to company-specific or internal reasons is called the unsystematic risk. These reasons can be many: deteriorating business prospects, declining business margins, management misconduct, competition eating margins, regulatory trouble, failed product launches, or any other issue that is unique to a particular company. The list can go endlessly, but the important thing to notice is that all these risks are specific to one company and not the entire market. For example, imagine you have an investable capital of 1 lakh and you decide to invest the entire amount in IT company stock. A few months later, the company announced that its revenues have declined. Naturally, the stock price will fall and you will lose money.

[00:01:15]However, this news will not impact the stock price of the company's competitors. Similarly, if the company's management is found guilty of misconduct, only that company's stock will fall and not its peers. These risks do not spread across the market. They stay confined to one company. That is exactly what unsystematic risk means.

[00:01:38]Now, to manage this risk, we diversify the portfolio by adding more stocks.

[00:01:43]Going back to the same example, instead of investing that entire 1 lakh in one IT stock, suppose you invested 50,000 in IT stock and 50,000 in another banking stock. In that case, even if IT stock falls due to some company-specific problem, only half of your money is affected because the other half is invested in a different business. You can extend this idea further by holding five stocks, 10 stocks, or even 20 stocks. The more stocks you add, the more you spread out company-specific risk and therefore, the lower your unsystematic risk becomes. This leads to a very important questions. How many stocks does a portfolio actually need in order to properly diversify this unsystematic risk? Research shows that once a portfolio reaches around 20 to 21 stocks, most of the unsystematic risk is already diversified. And adding more stocks beyond that point may not provide much additional benefit. The graph should give you a fair sense of how diversification works. When you start adding stock, risk falls sharply, but after around 20 stocks, the curve begins to flatten.

[00:02:57]That flattening means that you are no longer reducing the risk meaningfully.

[00:03:02]So, owning to 40 or 50 stocks does not make you much safer than owning 20 stocks. In fact, a portfolio about 15 to 20 well-chosen stocks is usually sufficient and it is also much easier to track, understand, [music] and manage. However, even after you have diversified properly, one type of risk still remains and that is called systematic risk. Now, what is the systematic risk? It is the risk that is common to all stocks in the market.

[00:03:33]Systematic [music] risk arises from a common market factor such as the macroeconomic landscape, political situation, geographical stability, monetary framework, etc. A few specific systematic risk which can drag the stock price down are like the growth in GDP, interest rates tightening, inflation, fiscal deficit, geopolitical risk. The list, as usual, can go. When these forces turn negative, almost all stocks fall together. Even if you own a perfectly diversified portfolio of 20 high-quality companies, a sharp economic slowdown or a sudden interest rate hike will hurt all of them at the same time.

[00:04:15]This is why unsystematic risk can be diversified away, but systematic risk cannot. That does not mean systematic risk cannot be managed. It simply means that it cannot be eliminated through diversification. It can only be hedged.

[00:04:30]This is where most investors get confused. Diversification and hedging look similar on the surface because both are about reducing risk, but they work in completely different ways.

[00:04:42]Diversification reduces unsystematic risk, while hedging is used to protect against the systematic risk. Now, to give you example, suppose you have 10 lakh rupees invested in stocks.

[00:04:52]>> [music] >> You spread this across 10 companies: IT, banking, pharma, FMCG, energy, and manufacturing. Now, if one company fails, your entire 10 lakh is not destroyed because only a portion of it is in that particular stock. This is diversification. You are reducing the risk that comes from one company that is doing something stupid. But now, imagine something else happens. Interest rates go up sharply or the economy slows down.

[00:05:19]The market falls by 20%.

[00:05:22]Your IT stocks will fall. Your bank stocks will fall. Your FMCG stocks will also fall. Everything falls. Your 10 lakh portfolio, let's say, becomes somewhere around 8 lakh rupees.

[00:05:33]>> [music] >> This loss happens even though you were diversified.

[00:05:37]That loss is caused by the systematic risk and diversification cannot save you from it. This is where hedging comes in.

[00:05:45]Hedging means you take another position that makes money when the market falls.

[00:05:50]So, that when your stocks lose, something else gains and offsets that part of the loss.

[00:05:56]>> [music] >> Diversification protects you from one company going wrong. Hedging protects you from the whole market going wrong.

[00:06:03]>> [music] >> But, how can one hedge their portfolios?

[00:06:06]Let's say you have a stock portfolio worth 14 lakh rupees.

[00:06:10]>> [music] >> You are worried that over the next few months, the market could fall because the interest rates are rising or the economy is slowing down. One way to hedge this risk is to short Nifty futures. Now, suppose your stock portfolio value is 14 lakhs. Nifty is somewhere around 23,000 and one lot of Nifty size is 65. Now, one Nifty future lot total value is 14 lakh 95,000 rupees. Your portfolio is roughly close to one Nifty lot, but to keep the example simple, we assume the portfolio moves almost exactly like Nifty. So, you decide to sell one Nifty future lot at 23,000 to hedge the portfolio.

[00:06:50]>> [music] >> Now, the first scenario is what if market actually falls by 10%? Nifty will fall from 23,000 to 20,700.

[00:06:58]Now, if your portfolio falls roughly in line with the market, then your 14 lakhs will become 12 lakh 60,000, which means you'll have to face a loss of 1 lakh 40,000 rupees. Now, suppose what if you would actually short the Nifty future at 23,000. Now, that price will be 20,700 and profit per unit will be around 2,300 points. So, your total future profit will be 1 lakh 49,500.

[00:07:26][music] So, your stock loss was 1 lakh 40,000. Your future's profit is 1 lakh 49,500, which means overall you will have a profit of about 9,500 rupees. So, the profit from future offsets the portfolio loss, protecting your capital. But, if we talk about another scenario, in this case, let's say the market rises by 10%.

[00:07:48]Nifty will rise from 23,000 to 25,300.

[00:07:52]Your portfolio will also rise from 14 lakh to 15 lakh 40,000, which means you will have a profit of about 1 lakh 40,000 rupees. Now, if you would have shorted the future, Nifty future, at 23,000, but now the price is 25,300. So, you would have to face a loss of 2,300 points per unit and your total loss would be 1 lakh 49,500.

[00:08:14]So, overall, your net loss will be 9,500 rupees. See, the key idea here is that by selling Nifty futures, you take a position that moves opposite to the market. If the market falls, future profits offset stock losses. If the market rises, future losses offset stock gains. So, the hedge stabilizes your portfolio value around 14 lakh rupees, reducing the impact of market swings.

[00:08:43]Ideally, your hedging position should be either equal to or less than your portfolio value. This is because, like you see the 9,500 loss when the market rises, in such cases, if the gap is more or if the market rises is significant, then you might incur severe losses. If your portfolio size is smaller than a single contract value, then you would probably be better off staying away from derivatives. In such cases, one way to reduce risk in your portfolio is to diversify across asset classes. Now, let's understand how you can diversify your portfolio. Number one is uncorrelated sectors. The first and most important rule of diversification is to invest in uncorrelated sectors. What this means is that if you buy 20 stocks, they should not all be moving for the same reason. For example, if you believe that disposable income in India is increasing, you might feel tempted to invest only in consumption-related sectors like FMCG, retail, consumer durables, etc. But, that is not real diversification because all these sectors depend on the same thing, consumer spending. If something goes wrong with the economy or people start spending less, all these stocks will fall together. A properly diversified portfolio should include other sectors as well, such as banks, IT, pharma, energy, manufacturing, or infrastructure. So that different parts of your portfolio react differently to the same economic situation.

[00:10:14]Number two is understanding the sector.

[00:10:17]While it is important to invest across uncorrelated sectors, it is equally important to invest only in businesses that you actually understand. You need to know how a company makes money, what drives its profit, and what can go wrong. Because diversification only works if you are able to research, track, and manage the companies you own.

[00:10:39]If you invest in something you do not understand, such as complex chemical or commodity businesses, or you might think you are diversified, but in reality, you will not know when to exit or increase your exposure. So your diversification should be built around sectors and companies that make sense to you. And on top of that, just to be safe, you might want to invest not more than 10% in a stock, and maybe 20% in a sector. This is how I do it, so you can have different limits, but make sure to have some limits, so that your portfolio is not driven by a single stock or sector.

[00:11:16]And number three is use of ETFs or mutual funds when you don't understand a sector. However, that does not mean you should completely avoid sectors you do not understand. If you want exposure to a sector like chemical, technology, or global markets, but you find individual companies difficult to analyze, then the smarter way is to use sector-specific ETFs or mutual funds. This allows you to get diversification within that sector without having to pick individual stocks or worry about which company will win.

[00:11:48]In this way, you can still get the benefit of diversification while [music] staying within your comfort zone of understanding. Now, let's quickly understand what are a few mistakes that you need to avoid. Number one, do not assume that owning a large number of stocks automatically makes your portfolio safer, because if they are driven by the same economic factors, your risk is still concentrated. Number two, do not build your portfolio around a single theme, such as only consumption, only technology, or only financials, because one macroeconomic shock can hurt all of them at the same time. Number three, do not invest in businesses or sectors that you cannot understand or track, because you cannot manage risk in something you do not understand.

[00:12:31]>> [music] >> Number four, do not allow one stock or one sector to grow so large that it dominates your portfolio, because position sizing is just as important as diversification. And number five, do not believe that diversification alone removes all risks, because market-wide crashes are systematic, and that requires hedging, not just more stocks.

[00:12:55]>> [music] >> See, what matters is not how many stocks you own, but how different they are from each other, and how well you understand them. I hope you like this video. See you in the next one, and till then, happy investing.