Now there is only one Stan Druckenmiller! He has never had a down calendar year (he has been down over a 12 month period). But the notion of having more than 70% of your assets in a single asset class seems really scary to me. Of course, as a macro investor he benefits from operating in markets like the currency markets where there is 24 hour trading and extremely high liquidity which means that he can quickly exit a position which starts to go wrong.
A poll on Twitter about position sizing had several participants talk of their largest positions being 70-80% of their portfolios. COming after Druckenmiller’s comments, this had me wondering if I have been doing this wrong, all this time. This is the second time I have looked at the subject, as I created a module in my Analyst Academy course talking about optimal position sizes. Rather than recap that content here, given that it’s a part of a course which students have paid for, I wanted to cover some other aspects in this article, and explore why Druckenmiller and others can tolerate this concentration when it seems extreme to me.
I have confined the discussion to equity portfolios where there is limited liquidity and markets and individual positions can be highly volatile. Although I cannot imagine having 70% of a professional portfolio in a single stock, what should the concentration limits be and how many stocks should you own? Obviously this varies enormously across individual investors but let’s look at a few considerations.
Clearly, concentration limits dictate how many stocks you have in your portfolio. If you have a single 70% position, it would presumably be odd to have 100 positions overall, so let’s first think about this conceptually in terms of equal weighted positions – clearly, every investor will want to size up their highest conviction bets, but the ability to do so is contingent on the number of positions overall and the risk tolerance.
In the course, I go into detail on my views of the “right” number of stocks and position concentration and explain why this is dependent on the individual, the type of portfolio and the risk tolerance of any end-investors. Ensemble Capital believes that around 25 stocks is the level at which an additional stock provides little additional diversification benefit. I have been involved professionally both with more concentrated professional portfolios and with wider ones. Private investors with limited time may not want to have this many, but 25-35 stocks is a popular level for many successful investors (for example, Terry Smith) who run what are generally regarded as relatively high concentration portfolios.
This bent towards a 30-odd stock portfolio has many proponents. It’s notable that Jeremy Hosking, founder of the eponymous Hosking & Partners, an investor with a strong and long track record, takes the opposite tack. Each manager will run a portfolio of c.150 stocks and the blended portfolio will contain 400 stocks or more. This has been a highly successful strategy. Hosking is an exception. Here is what Ensemble Capital says:
Their contention is that your best ideas should perform best and obviously there is a limit to how many good ideas you can have. My experience in special situations investing was that the Pareto principle operated – a relatively small number of positions delivered 70-80% of the alpha in a year, but at the start of the year, you obviously don’t know which stocks will be the most successful. So by having a broader portfolio, you give yourself a better chance of exposure to the themes which become the most popular.
Lucy MacDonald, former CIO Global Equities at Allianz and a highly experienced investor, thinks that with a concentrated global portfolio of 30 stocks, your alpha should be delivered by a spread of positions. The chart shows our estimates of the contributors of the top 5 stocks to Fundsmith’s performance in the ten years since inception, excluding the first two months of 2010 (excluded as the results for a two month period are more likely to be more random).
The number of positions has been in a range of roughly 20-30, with the lowest seen being 22, but we don’t have data for every year. The average is probably close to 25 and the top 5 is probably close to the Pareto 20%. The rule does not quite work as you can see from the chart as the spread most years has been more even with the top 5 contributing c.45% and the remaining roughly 20 socks contributing 55%. But one year, the top 5 contributed almost the entire portfolio performance, helped by a takeover, and in another, the defensives contributed more than the entire modest portfolio gain with the remainder being negative. Overall, we estimate that the average is c.72%. Note that this is only a rough estimate as the individual performance data have not been disclosed each year.
Obviously, the fewer stocks, the more concentrated the performance will be. And if you have confidence in your stock-picking ability, isn’t a narrower portfolio better? And should you not size up your favourite bets? My view, which I explain in more detail in the paid courses, is that this is a highly personal matter – you should have as many or as few stocks in your portfolio as suits you, provided that you have enough to give you diversification. On this subject, there is a significant amount of academic debate.
Ever stared at your investment portfolio and wondered if you’re spreading yourself too thin? Or maybe you’re worried that you don’t have enough diversification? I’ve been there, and the question of whether 20 stocks is too much (or too little) is something many investors struggle with.
The Concentration Dilemma
When I first read about Stanley Druckenmiller’s approach to investing, I was shocked. In a recent interview, he advocated putting “all your eggs in one basket and watching it very carefully.” He even mentioned investors putting 50-70% of their assets into a single asset class! That’s concentration on steroids.
But here’s the thing – Druckenmiller has never had a down calendar year. He’s not your average investor, and he trades in highly liquid markets where he can exit positions quickly if things go south.
Meanwhile, some Twitter poll participants mentioned their largest positions being 70-80% of their portfolios. This extreme concentration makes me wonder if I’ve been doing it all wrong with my more balanced approach.
What Research Says About Portfolio Size
Let’s look at what the experts say about the ideal number of stocks
Opinion 1 10 StocksA 1968 study by Evans and Archer concluded that just 10 random stocks were sufficient to replicate the market. But this study is pretty old and markets have changed dramatically since then.
Opinion 2: >30 Stocks
Meir Statman’s research found that a well-diversified portfolio needs at least 30 stocks, contradicting the earlier “10 stocks is enough” theory.
Opinion 3: 50 Stocks
Burton G. Malkiel (author of “A Random Walk Down Wall Street”) co-authored a paper showing that from 1962 to 1997, firm-level volatility increased relative to market volatility, suggesting more stocks are needed for proper diversification.
Opinion 4: 12-18 Stocks
Reilly and Brown concluded in their book “Investment Analysis and Portfolio Management” that about 90% of diversification benefits come from portfolios of 12 to 18 stocks.
The Case for 20-30 Stocks
Many successful professional investors (like Terry Smith) seem to settle on portfolios of around 25-35 stocks. Ensemble Capital believes that around 25 stocks is the sweet spot where additional stocks provide diminishing diversification benefits.
As they put it: “Owning 150 stocks or 350 stocks dramatically dilutes any ability you might have to beat the market without adding much in the way of diversification because you’ve already captured most of the benefits with your first 25 stocks.”
There are exceptions, though. Jeremy Hosking runs portfolios with 400+ stocks and has been highly successful. But he’s definitely an outlier.
The Pareto Principle in Action
In investing, the Pareto principle often applies – a small number of positions deliver most of your returns. For example, looking at Fundsmith’s performance over a decade, the top 5 stocks (out of roughly 25) contributed an average of 72% of the total performance.
The challenge is that at the beginning of the year, you don’t know which stocks will be your best performers. Having a broader portfolio increases your chances of catching those winners.
Position Sizing and Risk Management
Position sizing isn’t just about how many stocks you own; it’s also about how much you allocate to each one. Joel Greenblatt offers some brilliant insight here:
“Sizing is the most important thing – being too timid on the few good ideas that come your way is like the biggest mistake people make.”
But he doesn’t just size up positions he thinks will skyrocket. Rather, he looks at downside protection:
“I will size the position larger if I don’t think I can lose much money. It’s not like the thing that’s going to pay 10 or 20 times.”
His philosophy: “If you don’t lose money, most of the other alternatives are good.”
Three Main Portfolio Risks
Steve Cohen identifies three main portfolio risks:
- Liquidity – Being unable to sell when needed
- Leverage – Borrowing too much to invest
- Concentration – Having too much in too few positions
Too much of any of these can cause serious problems.
So, Is 20 Stocks Too Much?
Based on all this info, 20 stocks is definitely NOT too much for most investors. In fact, it’s right in the sweet spot suggested by several experts!
Here’s my take on appropriate portfolio sizes:
- 10-15 stocks: Minimum for basic diversification, but potentially high volatility
- 15-25 stocks: Good balance for many individual investors
- 25-35 stocks: Optimal for professional investors or very active individual investors
- 35+ stocks: Potentially diluting your best ideas unless you have exceptional research capabilities
Finding Your Personal Sweet Spot
The “right” number of stocks is highly personal and depends on:
- Your risk tolerance
- Your research capacity
- Your investment style
- Your time horizon
- Your sector/geographic focus
If you want to be more concentrated but are worried about risk, consider this practical approach: combine your individual stock picks with index ETFs. This lets you focus on stocks you like while maintaining broader market exposure.
My Real-World Example
I once analyzed UK supermarket stocks like Morrison and Sainsbury’s. They seemed like perfect Greenblatt-style investments – trading below asset value with limited downside. But even with this “safe” thesis, both stocks essentially went nowhere for 5 years!
This taught me that concentration is risky even with seemingly safe bets. Time horizon matters enormously, and most investors don’t have the patience to wait 5+ years for a thesis to play out.
What Works For Me (And Might Work For You)
I personally believe a 25-30 stock global portfolio is becoming the norm for good reason. It offers:
- Enough diversification to sleep at night
- Enough concentration to outperform indexes
- Enough positions to catch those few big winners
- Enough focus to truly understand each company
For private investors who struggle to find 25+ good ideas, I recommend a hybrid approach:
- Put 50-70% in 10-15 individual stocks you understand deeply
- Put the rest in 1-3 broad market ETFs
This gives you the best of both worlds – potential outperformance from your stock picks and broad market exposure from your ETFs.
So no, 20 stocks is not too much. For many investors, it’s actually a sweet spot that balances concentration and diversification.
Remember what Greenblatt said: “It’s looking at how much can you lose from that position.” Focus on protecting your downside while giving yourself enough exposure to potential winners.
Whatever number you choose, make sure it’s one that lets you sleep at night while still giving your portfolio the potential to meet your financial goals.
What’s your ideal portfolio size? Have you found success with more concentration or more diversification? I’d love to hear about your experiences in the comments!
OPINION 3: 50 STOCKS
In this paper, co-authored by Burton G. Malkiel, the widely acclaimed author of a Random Walk down Wall Street, four academics studied the volatility of common stocks and concluded that from 1962 to 1997 there had been a noticeable increase in firm-level volatility relative to market volatility, and that the number of stocks needed to achieve a given level of diversification had increased.
OPINION 2: >30 STOCKS
In How Many Stocks Make a Diversified Portfolio?, Meir Statman concluded that a well-diversified portfolio of randomly chosen stocks must include at least 30 stocks, which contradicted the earlier study and what the author suggested was a then widely accepted notion that the benefits of diversification are virtually exhausted when a portfolio contains approximately 10 stocks.
Stock Multiples: How to Tell When a Stock is Cheap/Expensive
FAQ
Is 20 stocks a lot?
Owning 20 to 30 stocks is generally recommended for a diversified portfolio, balancing manageability and risk mitigation. Diversification can occur both across different asset classes and within stock holdings, helping to reduce the impact of poor performance in any one investment.
Is 20 shares an odd lot?
Key Takeaways. An odd lot in trading involves purchasing fewer shares than a round lot, typically less than 100 shares. Odd lots often have higher trading commissions due to fixed minimum fees set by brokerage firms.
Is 20 stocks too many on Reddit?
There is a bell curve example of this somewhere I saw it through a podcast recently mentioned where if you have 10 stocks you likely can outperform the S&P500 by 1-5x if you have 20 stocks you can outperform the S&P500 by 20-100% and if you have more then 25-30 stocks your likely matching with high risk the S&P500…
Is owning 100 stocks too many?
20 stocks may reduce volatility, but it’s not enough to reduce return uncertainty. 50–100 stocks strikes a better balance between expected return and risk. For factor investors, concentration improves returns—owning less stocks has historically improved returns.