Trading Basics: Evolution of a Trader

HOW MANY STOCKS TO HOLD?

During the early years, the number of stocks I held varied, but numbered no more than a dozen. Often, it was just four or five. The number 10 is recommended often in literature as the optimum size for small investors. It is large enough for diversification and yet manageable. Mark Vakkur (September 1997) wrote that 85 percent diversification occurs by owning just seven or eight stocks.

That brings up two quick anecdotes. When I was working at Tandy, I visited the library downstairs in my off hours. I remember an older man commenting that he owned over 40 stocks and saying, “I can't keep track of them all.” No kidding!

In the fitness center's locker room, another man said that he owned only one stock, placing all of his eggs in one basket by taking a huge position. “Just watch that basket,” he said.

After the 2007 to 2009 bear market ended, I started buying stocks again. I plunked down $10,000 and bought a stock. Then I did the same with another stock and maybe added another $10k to the first stock. I am holding 25 stocks and one exchange traded fund, not counting another three mutual funds in my IRA.

In essence, I am running my own mutual fund, split into 14 industries (some are related, like eastern, central, and western utilities or various types of insurance companies). Almost all are positions I intend to hold for the long term, so trading is infrequent. That makes the large portfolio simple to manage. If I was actively trading, I would consider cutting ...