What is the ideal number of companies you should have in your portfolio? I would say 20 to 30. Because nobody can be a hundred per cent sure about the future of any company. If you have a very concentrated portfolio with a limited number of companies, you may get into trouble if any of it sinks.
There are many examples of this. One is the latest news of the famous portfolio manager and investor Porinju Veliyath having sent a letter to his clients admitting his mistake in investing in LEEL Electricals Ltd. The share price of the company tanked more than 80% from 2018 to date.
Another news a week ago shows how a decline in share price of the Apple Inc. affected legendary investor Warren Buffet's book value.
It is always safe to diversify enough to save your portfolio from such incidence. In order to have a check on this, you may set some rules for your portfolio.
1. Don't buy more in the companies that are in top 3 by value.
2. Maintain a maximum 50% of value in the top 10, 80% in the top 20, and 100% in 30 companies. In other words, 50% the first 10 companies, 30% in next 10 and 20% in next 10.
3. For the above, consider the current value, not the invested amount.
4. Don't invest more than 20% in a single industry.
However, there are different views on this. Some people advocates for less number of companies. They have their own reason for it. There is no right or wrong. All are different perspectives and different level of risk tolerance. But for the individual investors who do not have the resource to conduct a deep study and due diligence on a company, it is better to be safe by diversifying instead of trusting a few companies.
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