If you know anything about investing, you probably know that you should diversify. Diversification is an important part of everyone's portfolio whether it's worth $1,000 or $1 million. Diversification means that you haven't put all your eggs in one basket. If you are investing in stocks and want to be diversified, you would invest in companies that are a part of several different industries. This would help reduce the risk in your portfolio because if one stock goes down, there are still others that might at least stay the same or go up.
Understanding diversification is easy. Actually doing it is another story. When some people hear 'diversify' and 'buy stocks in different industries' they go out and buy 40 different stocks. Is this how many stocks you should buy to stay diversified? How many stocks should you buy if it's not? Buying stock in 40 different companies is not smart. Why? Because there is no way you can research and keep up with 40 different companies and have a full time job and a life.
When you buy stock in a company, there are many things you need to do beforehand. You have to live and breathe that company. You must do your research. You need to read the annual statement and financial statements, you must keep up on news about the company, and you must know the company. You should never invest in a company that you can't understand whether it's that you can't understand how they make their money or what their product does.
If you invest in 40 companies, or even just 20, you won't be able to put in the right amount of time for each stock. It make take you up to 1 hour per week to keep up with each stock. If you feel this is too much time, you might not be well committed to investing into stocks directly and should invest in a mutual fund or index fund. If you are interested, in order to make investing worth your time and still have a diversified portfolio, you should invest in 5 to 10 stocks. If you are investing a smaller amount, 5 stocks should be enough.
Investing in only a few stocks will make sure you are able to keep up with the proper research while still giving you enough diversification. Some people may think you need at least 20 to diversify, but this is a misconception. You just need to make sure you invest in stocks of different industries that you know well and believe have the potential to increase in price. Start with 5 stocks and go from there.
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