Concentrated vs Diversified Portfolios: How Many Stocks to Own

Introduction

Concentrated vs diversified portfolios refers to whether you hold a small number of stocks in large positions, or a large number of stocks in smaller positions. This choice affects how much idiosyncratic risk you take and how likely you are to capture big winners or avoid big losers.

Why does this matter to you as an investor? Your number of holdings influences expected return volatility, the time you spend managing positions, tax and trading costs, and how you feel during big market moves. What you'll learn here is how the two approaches differ, the trade-offs, simple rules of thumb, and a practical middle path many investors use.

We cover definitions, pros and cons of each approach, realistic examples with numbers, a suggested framework called core-satellite, common mistakes, and answers to four common questions. Ready to decide how many stocks make sense for your situation?

• Concentrated portfolios put more weight on big winners but carry a higher chance of large losses.
• Holding about 20 to 30 stocks removes most single-stock risk for many retail investors.
• Core-satellite blends a low-cost broad market core with a few high-conviction satellite positions.
• Position sizing rules, rebalancing, and risk limits help you pick an appropriate number of holdings.
• Decide based on your goals, time horizon, risk tolerance, and how much research you will do.

What is a concentrated portfolio and what is diversification?

A concentrated portfolio focuses capital in a small number of stocks, often 1 to 10 positions. Investors who favor concentration believe deep research lets them pick outsized winners. Famous investors known for concentrated bets include Warren Buffett, who often holds big stakes in a few companies such as $AAPL and the large bank positions owned through $BRK.B.

A diversified portfolio spreads capital across many stocks, sectors, and sometimes asset classes. Diversification reduces unsystematic risk, which is the risk unique to individual companies. Index funds and ETFs are simple tools that give you broad diversification with one purchase, for example $VTI or $SPY.

Pros and cons of a concentrated portfolio

Concentration can magnify returns if you identify a future superstar. If one holding multiplies several times, a concentrated portfolio benefits more because that holding represents a larger share of your capital.

But concentration raises the chance that a single bad outcome will meaningfully hurt your net worth. Company-specific events like fraud, management mistakes, severe competition, or regulatory trouble can wipe out a large chunk of value quickly.

When concentration can make sense

• You have deep knowledge and conviction about a business or industry.
• You can tolerate high volatility and potential large drawdowns.
• You plan to hold long term and understand company fundamentals.

Practical example

Imagine you hold five equal positions of 20% each, including $AAPL, $MSFT, $AMZN, $TSLA, and $GOOGL. If one of those falls 50%, your portfolio drops 10% overall. If instead one of your five doubled, your portfolio would gain 20%. You can see how big moves in single stocks move a concentrated portfolio substantially.

Pros and cons of a diversified portfolio

Diversification reduces the impact of any single company on your overall returns. A well-diversified equity portfolio often includes dozens of holdings or uses broad ETFs that represent hundreds or thousands of stocks.

While diversification lowers downside risk from individual company failures, it also means your upside from single winners is diluted. If a single company later becomes a 10-bagger, your portfolio benefit is a smaller fraction of your total capital.

How many stocks reduce single-stock risk?

Academic and practical studies show that most single-stock, or unsystematic, risk is greatly reduced after about 20 to 30 diverse holdings. Adding more stocks beyond that yields diminishing marginal reduction in company-specific risk. Using a broad-market ETF like $VTI gives diversification across thousands of names in one trade.

Practical example

If you hold 30 equal-weighted stocks and one drops 50%, your portfolio is hit for about 1.67%. Compare that to a five-stock equal-weighted portfolio where the same single-stock loss costs you 10%. That difference explains why diversification helps smooth returns.

Finding a balance: core-satellite and rules of thumb

You do not have to choose extremes. The core-satellite approach blends a diversified core with concentrated satellite positions. That gives you the stability of broad exposure and the potential upside of high-conviction ideas.

Core-satellite explained

1. Core: Put 60% to 90% of your equity allocation into low-cost broad funds such as $VTI or $SPY. This gives market exposure with minimal work.
2. Satellites: Use the remaining 10% to 40% for 3 to 10 individual stocks where you have conviction.

This structure reduces the harm from any single stock, while preserving the chance to outperform through your picks. It also lowers trading costs and tax friction compared to a fully concentrated approach.

Simple rules of thumb for position sizing

• Beginners aiming for individual-stock exposure often choose 15 to 30 positions to remove most idiosyncratic risk.
• If you want a few high-conviction bets, limit each satellite position to 3% to 10% of your portfolio so a single loss cannot derail your plan.
• Use stop loss rules only if you understand how they interact with market volatility. Often regular rebalancing and position size limits matter more.

Real-world scenarios with numbers

Scenario A, concentrated: You allocate 80% to $AAPL and $MSFT split 40% each and 20% cash. If $AAPL falls 40% after an earnings shock, your overall portfolio loses 16% immediately. Recovering from a 16% drop needs about a 19% gain, assuming no new contributions.

Scenario B, core-satellite: Your core is 70% $VTI and 30% satellites across six stocks at 5% each. If one satellite drops 50%, your total portfolio loss is 2.5%. That is a much smaller hit and easier to tolerate emotionally and financially.

Scenario C, diversified DIY: You hold 25 equal-weighted stocks with average trading costs and rebalance annually. One company fails and goes to zero. Your loss is 4% of your portfolio. With this setup most single-firm failures are survivable and learning about company selection is less painful.

Behavioral and practical considerations

Your psychology matters as much as math. If you know you will panic and sell when a top holding drops 30%, a concentrated portfolio may lead to poor timing decisions. Diversification cushions emotion and helps you stay invested.

Time and skill matter too. Concentrated investing requires work. You need to read filings, follow industry news, and update your thesis. If you lack time or interest, broad ETFs give you sensible market exposure without the maintenance.

Common Mistakes to Avoid

• Too few positions without expertise, leading to outsized losses. Avoid this by limiting single-position size or building a core-satellite structure.
• Overconfidence after a few wins. Track your success rate objectively and don’t increase position sizes based on recent gains alone.
• Ignoring sector or factor concentration. You may hold 20 names but still be concentrated in one sector. Check sector weights and diversify across industries.
• Frequent trading in a concentrated portfolio. High turnover increases costs and tax friction. Instead set clear rules for adding or trimming positions.
• Copying others blindly. Famous investors have different time horizons, access, and tax situations. Make decisions that fit your goals and constraints.

FAQ

Q: How many stocks should a beginner own?

A: Many beginners find 20 to 30 diversified stocks reasonable if they want to invest in individual companies. Alternatively, a simple core of a broad ETF like $VTI plus 3 to 6 satellite stocks gives diversification with some individual exposure.

Q: Will holding fewer stocks increase my returns?

A: Holding fewer stocks increases return volatility and the chance of both big gains and big losses. Concentration can increase average returns if you consistently pick winners, but it raises the probability of large drawdowns.

Q: Can I diversify with just a few ETFs instead of many stocks?

A: Yes, a handful of broad ETFs covering US total market, international stocks, and bonds can provide strong diversification. ETFs like $VTI and $BND cover equity and bond exposure with low cost and minimal maintenance.

Q: How often should I rebalance a mixed portfolio?

A: Rebalancing annually or when allocations drift by a set threshold, for example 5%, is common. Rebalancing enforces discipline and helps control risk, but frequency should reflect tax considerations and trading costs.

Bottom Line

Concentration and diversification each have trade-offs. Concentrated portfolios can produce exceptional returns for informed investors who can tolerate high volatility. Diversified portfolios reduce single-stock risk and are easier to manage for most people.

Decide how many stocks to own by assessing your time, research skill, risk tolerance, and emotional response to losses. A practical and beginner-friendly approach is a core-satellite mix with a diversified core and a handful of satellites limited to modest position sizes.

At the end of the day pick a plan you can stick with, set simple rules for position sizing and rebalancing, and keep learning from both wins and losses. Your next step is to review your goals, choose an appropriate core allocation, and set limits for satellite positions so you can try a balanced approach while you build experience.