A portfolio may not only include stocks, it may include a wide range of investments, including stocks, bonds, cash investments or real estate.
The aim of building a portfolio is to spread your money across several investments, reducing the risk that the investor will lose money. As the old saying goes, ‘don’t put your eggs into one basket’.
Investing in a small number of investments is very risky. With your investment funds being spread across a handful of investments, it is more likely that you would lose a significant amount of money. Therefore, building a portfolio with a larger range of investments is an important consideration.
An investor that likes to take big risks may decide to hold fewer investments, while an investor that would prefer to reduce risk in their portfolio, may decide to hold a large number of investments.
To give you an idea of how many stocks is considered to be an ‘ordinary’ amount, the average investor holds between 20 to 30 investments in their portfolio. This is not a set rule though, with many investors holding many more than that.
For instance, an individual that has a strong interest in food may decide to invest in a range of food businesses (i.e. Mcdonald’s). This would especially be a smart idea if they had an understanding of how the food industry worked.
The easiest way to invest using knowledge is to make investments that are related to your professional background. With that in mind, investing in the same sector all of the time would be risky as well, with this being something that we will discuss later on in this course.