Opinion – From Grain to Grain: What is the ideal number of shares to have in your portfolio?

In recent years, the number of investors in the stock exchange has skyrocketed. In the year 2020, after the month of April, almost any stock that was bought generated a positive result. So some investors went out buying everything. Once the euphoria is over, the bill arrives and the doubts disappear. Many cannot keep up with portfolios that have more than 40 companies. Hence, the question arises: what is the ideal number of shares to have in the portfolio?

Buying many stocks can be seen as a diversification benefit.

One of the biggest risks in equity investing is waking up and reading that there has been a regulatory change, an environmental accident or another fact that affects only the company that invested and has a strong impact on results.

This is called specific risk, also known as unsystematic or diversifiable risk. As the name implies, you can mitigate this risk by diversifying.

If you have a lot of stocks in your portfolio, this risk can be greatly reduced.

However, there is a balance between reducing this risk and the costs inherent in having many assets.

With the reduction in brokerage costs, the biggest cost of having many assets in the portfolio is the cost of controlling, monitoring and researching the shares in the portfolio. This cost ends up being higher than that of brokerage. After all, how much is your time worth?

Investors who want to build their stock portfolio should commit to at least 1 hour per week for each company in their portfolio. Thus, a portfolio with more than 40 stocks becomes unfeasible or with monitoring failure.

To solve the doubt about the ideal number of shares, researchers Fernando Oliveira and Eduardo de Paula published the work entitled “Determining the Optimal Degree of Diversification for Investors Users of Home Brokers”.

In this article, Oliveira and de Paula argue that “the optimal number of shares in the portfolio is the one that equals the benefit with the cost of placing one more share in the portfolio”.

They came to the conclusion that the ideal number for an individual investor to keep in his portfolio is 12 shares.

Several national and international authors reached similar results and agree with this number, for example the works of Ricardo Brito from 1989 and Cereta e Costa from 2000.

Comment here how many shares you have in your portfolio and how much time you spend researching companies per week.

With this information, assess how many assets you have in your portfolio. If you have more than 12 shares, whenever you decide to include one more share, evaluate which would be the worst in the portfolio to make way for the new asset you want to add.

Michael Viriato is an investment advisor and founding partner of Investor House

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