How Many Stocks Should You Hold in Your Portfolio? Optimal Size & the Risk of 'Diworsification'

One of the most common questions new investors on Bursa Malaysia ask is: "How many stocks should I hold in my portfolio?" The advice you get usually drifts to one of two extremes. Some people say "just focus on one or two stocks if you are confident". Others say "diversify everything - do not put your eggs in one basket; buy 30 or 40 stocks".

Both pieces of advice have problems. Too few, and you carry unusual risk if one company fails. Too many, and you may create "diworsification" - a portfolio that looks diversified but actually performs mediocrely, and you cannot monitor every stock carefully.

This article answers that basic question honestly. What the science of investing says, what Buffett says, and what works for Malaysian retail investors based on your capital size and experience level.

Short Answer

For most retail investors on Bursa Malaysia, the optimal portfolio size is between 8 and 20 stocks, spread across at least 5 different sectors. Below 8 is too concentrated for most ordinary investors, while above 20 becomes too hard to manage without turning into an index fund without the low cost advantage of an index fund.

But this answer depends on your capital size, the time you can spend, and your level of experience. Let us break it down in detail.

What Investing Science Says

This question has been studied academically for more than 50 years. The results are interesting because they show that the benefits of diversification have diminishing returns.

The classic study by Evans and Archer (1968) found that around 10 to 15 stocks are enough to eliminate most company-specific risk (unsystematic risk). Beyond this level, adding more stocks gives only a very small additional benefit.

Later research by Meir Statman (1987) - the reference CFA Institute currently uses - found that for more complete diversification, 30 to 40 stocks are needed. Modern research even suggests 100+ stocks for optimal diversification.

But here is where retail investors need to be honest with themselves: you are not an institutional fund. You do not need a "mathematically optimal" portfolio - you need a portfolio you can realistically manage. The additional benefit of moving from 15 stocks to 30 stocks is small. The additional benefit of moving from 30 to 100 is even smaller. But the time burden of researching 100 companies is much larger.

That is why most practical advice for retail investors lands in the 10-25 stock zone - enough diversification to reduce specific risk, but not so much that you lose focus.

Concentration vs Diversification: Two Schools of Investing

You will hear two extreme views on portfolio size. Understand both before choosing.

The concentration school is led by Warren Buffett. He once said, "Diversification is a protection against ignorance. It makes very little sense if you know what you are doing." Berkshire Hathaway, Buffett's company, is famous for holding large positions in just a handful of companies - Apple, Bank of America, Coca-Cola, American Express. The logic: if you have truly researched a company and you believe in your investment thesis, why dilute that focus by adding weaker stocks?

The diversification school is led by John Bogle, founder of Vanguard. He argued that most investors (including professionals) cannot beat the market consistently. The best strategy for them is to buy the whole market - index funds with hundreds of stocks. Broad diversification protects you from your own analytical mistakes.

Who is right? Both - but for different people. Buffett is right for investors who truly spend time studying companies. Bogle is right for those who do not. The real question is not "concentration or diversification", but where you sit on that spectrum.

In this context, it is also important to distinguish the types of stocks you hold - not just the number. We explain this in our article Defensive vs Growth Stocks: Why a Smart Portfolio Needs Both.

What's Optimal for Bursa Malaysia Investors

Now let us get practical. The following suggestions take into account capital size, the time you have, and the realities of the Malaysian market.

New Investors With Small Capital (Under RM10,000)

For investors just starting out with under RM10,000, 3 to 5 stocks is enough. Beyond that, transaction costs and minimum lot sizes make broad diversification impractical. It is better to hold a few stocks you truly understand than many stocks you bought half-confidently.

At this stage, the main focus is not perfect diversification - it is learning. Every stock you buy is an opportunity to understand how the market works, how to read financial statements, and how to manage emotions. Five stocks that you study well teach you more than 20 stocks you bought on autopilot.

Medium Investors (RM10,000 - RM100,000)

For investors in this range, 8 to 15 stocks is the optimal zone. You already have enough capital for meaningful diversification, but not so much that 20+ stocks become hard to manage.

Ideal allocation: diversify across 5 to 7 different sectors - for example banks, REITs, consumer, utilities, technology, plantations, and energy. Make sure no single sector exceeds 30% of your portfolio. The Malaysian market has notable sectoral concentration - many FBM KLCI components are banks and plantations, so you need to deliberately seek exposure to other sectors.

Experienced Investors (RM100,000+)

For investors with larger capital and several years of experience, 15 to 25 stocks is appropriate. At this size, you can have several larger "core positions" (Buffett-style) and several smaller "satellite" investments for special opportunities.

Suggested structure: 60-70% in 6-8 core stocks you are most confident in, and 30-40% spread across 10-15 smaller satellite stocks. This gives you focus on your strongest convictions while still protecting you from surprises in any one stock.

Very Passive Investors

If you have no time at all to study individual stocks, do not pretend to be an active investor. Buy index funds (ETFs) like the FBMKLCI ETF or global market funds. You will get exposure to hundreds of stocks at low cost and without needing to make individual stock decisions. This often beats the "active" portfolio of part-time investors.

'Diworsification' - When Too Many Stocks Becomes a Problem

Peter Lynch, the legendary fund manager of Magellan Fund, coined the word "diworsification" - a portmanteau of diversification + worse. The meaning: adding more stocks is not always good. At some point, more stocks actually worsens your performance.

A few ways diworsification happens:

You cannot monitor all the stocks. If you hold 40 stocks but only read financial reports for 5 of them, you actually do not know what is happening in the other 35. That is not diversification - that is neglect.

Returns become just market average, without the cost advantage. When your portfolio has 50-80 stocks, its performance will resemble the market index. But you pay brokerage fees on every stock and do not get the low-cost advantage of an index ETF. Same outcome, higher cost - that is not a win.

Your best stock picks get diluted by mediocre ones. If your 30th idea is not as strong as your 3rd idea, why add it? Each new stock in the portfolio reduces the impact of the truly great picks.

You might not actually be diversified. Holding 40 stocks that are all in the banking sector does not protect you from a banking crisis. Real diversification requires stocks from different sectors - not just a large count.

We also look at this issue in Your Favourite Stock Might Be the Biggest Risk in Your Investment Portfolio - not purely a concentration problem, but concentration you do not realise.

5 Portfolio Sizing Mistakes Investors Often Make

Mistake 1: Too high concentration in one stock. Putting 50% or more of your portfolio in a single stock, even one you are confident in, is unnecessary risk. Even if your analysis is right, unexpected shocks (scandal, management, sector) can wreck your portfolio. Usual limit: no single stock should exceed 20% of the portfolio.

Mistake 2: Concentration in one sector. Investors often buy "good stocks" that all happen to be banks or all tech. If that sector falls, your whole portfolio falls with it. Always check: what percentage is my portfolio in each sector?

Mistake 3: Adding stocks based on FOMO. Buying new stocks just because they are trending, without removing weak stocks from the portfolio. The portfolio ends up as a storage room for stocks that were never reviewed.

Mistake 4: Never selling. Some investors keep adding stocks but never remove the ones that are not working. The portfolio becomes long and unwieldy, with many "legacy stocks" that should have been sold long ago.

Mistake 5: Cosmetic diversification. Holding 25 stocks looks diversified, but if they are all small-caps in the same sector, you are not truly diversified. Look inside, not just at the count.

Practical Application: Building a 10-Stock Portfolio on Bursa Malaysia

Let us do a practical exercise. Assume you have RM30,000 and want to build a 10-stock portfolio. Here is a suggested allocation (as an example, not investment advice):

• Bank sector (25%): 2 large counters (e.g. major Bursa banks) - core sector, stable dividends.
• Consumer (15%): 1-2 counters in essential consumer goods companies.
• REIT/Property (15%): 1-2 REITs for property exposure with dividends.
• Utility/Telco (10%): 1 defensive counter.
• Technology (15%): 1-2 tech counters for growth.
• Plantation/Commodity (10%): 1 plantation or O&G counter.
• Cash/opportunity (10%): hold for buying opportunities.

Each counter around RM2,500 to RM4,000 - large enough to matter, not so small that it gets eaten by transaction costs. Beyond that, do not forget to review every quarter: is the investment thesis for each counter still valid? If not, swap counters - do not just add.

To understand how psychology can sabotage portfolio decisions like this, read Investor Psychology: 7 Mental Biases That Make You Lose Money on Bursa Malaysia.

FAQ

1. What is the minimum number of stocks to be considered "diversified"? For meaningful company-specific risk reduction, the minimum is 8 stocks across at least 4-5 different sectors. Below that, the portfolio's performance depends too heavily on one or two stocks.

2. Is it better to hold 5 stocks I truly understand, or 20 I understand only half-way? For most retail investors, 5 you truly understand is better than 20 you understand half-way. But just 5 brings high concentration risk - if one is wrong, the portfolio is badly hurt. The ideal solution: research properly so you have 8-12 you understand fully.

3. Does Buffett hold many stocks? No. At any time, about 70-80% of Berkshire Hathaway's portfolio value is concentrated in just the top 5-8 stocks. Buffett practises "informed concentration" - an approach that only works if you do deep research.

4. What about ETFs? Do they count as "one counter" or "hundreds of stocks"? For diversification purposes, one broad index ETF (like the FBMKLCI ETF) gives you exposure to hundreds of stocks in one counter. That counts as broad diversification. So you can have a "5-counter portfolio" that is actually very diversified if 1-2 of them are index ETFs.

5. Do foreign stocks count in my portfolio size? Yes. Investments in US or Hong Kong stocks are part of your portfolio. In fact, geographic diversification (Malaysia + overseas) is an additional layer of protection, because it reduces country-specific risk.

6. How often should I review the portfolio allocation? Quarterly (every 3 months) is a reasonable frequency. More often encourages over-trading; less often causes the portfolio to drift far from your target allocation. At each review, ask: is the sector allocation still within the range I want?

7. What is the difference between "diversification" and "diworsification"? Diversification: holding stocks from different companies and sectors to reduce risk. Diworsification: adding stocks until you hold many you do not truly understand or monitor, while getting mediocre returns - without the low-cost advantage of an index fund.

8. Can I start with 3 stocks and add more later? Yes, in fact this is a healthy approach for beginners. Start with 3-5 stocks you truly understand, get used to how the market works, and then gradually expand your portfolio. Investing consistently every month, through the dollar cost averaging technique, helps you build the portfolio in a disciplined way.

Conclusion

There is no magic number for portfolio size - but there is an optimal zone based on your capital size, experience, and time available. For most Malaysian retail investors, 8 to 20 stocks across 5-7 sectors is a good balance between meaningful diversification and realistic management ability.

What matters more than the number is quality - understanding every stock you hold, ensuring no excessive concentration in one stock or sector, and avoiding diworsification by not adding stocks just to look diversified.

To start building a balanced, manageable portfolio, you need a platform that gives you access to the stocks you want to buy.

Open a CDS and trading account to start investing in stocks on Bursa Malaysia as well as foreign markets such as the United States and Hong Kong through a single platform.

If you are just starting out and want to understand the basics of stock investing properly, download the free Stock Market Basics Ebook as your first step.

Further Reading

• Defensive vs Growth Stocks: Why a Smart Portfolio Needs Both
• Your Favourite Stock Might Be the Biggest Risk in Your Investment Portfolio
• The Intelligent Investor Summary: Mr. Market, Margin of Safety & How to Apply Graham's Ideas on Bursa Malaysia
• Investor Psychology: 7 Mental Biases That Make You Lose Money on Bursa Malaysia
• Dollar Cost Averaging and Regular Savings Plans