Another blog I follow, TSI Network Daily, discusses how to know how many individual stocks should be in your portfolio. As usual, their advice is simple and wise.
But they, as with nearly everyone else who I've seen post on this topic, miss one key point: the impact your portfolio size has on your time.
If you, like me, are building a portfolio as a sustainable, long-term source of "passive" income, you should be investing a significant amount of time understanding the companies in which you're investing. (If you're not, by the way, your risk is a lot higher than you think. You need only look at Enron, Lehman Brothers, and most of the other largest bankruptcies in history to prove the point - and that list doesn't include the countless cases that didn't result in bankruptcy, but produced sub-par or negative returns). I subscribe to the Warren Buffett theory here, that is, to not invest in any business you don't understand.
As TSI points out, new investors most often start with smaller sums of money. But they're probably also working with smaller amounts of time; they're likely working full-time, and many will have family and other commitments too (like blogging!). A portfolio of 30 companies represents 30 companies' news to follow, 120 quarterly statements to analyze, 30 annual information filings, etc.
That's a real trade-off between the amount of time you can commit to monitoring your portfolio and the diversification you can achieve. That said, I believe that a thoughtful and patient investor can build a reasonably diversified portfolio in about 15 individual stocks.
Clearly, though, this is not "passive" income. And that's why, until I have a suitable portfolio to live off of indefinitely and therefore I can be a "full-time" investor, I plan to keep my portfolio to 20-25 positions.
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