How many stocks do I need to be diversified?

There is no fixed number. More different stocks reduces the effect of any one company, but the number is not everything. Ten stocks from the same sector diversify less than four from different sectors. A fund or ETF often holds hundreds of stocks in one product.

Should I also invest outside my home country?

If you invest only in companies from one country, you depend heavily on a single market. Investing in several regions can reduce that. It does bring other risks, such as currency differences. How much fits depends on your goals.

How do I split my money between stocks and bonds?

No split suits everyone. It depends on how long you want to invest, how much ups and downs you can live with and what your goal is. A split with more stocks can swing more. A rule of thumb based only on your age is too simple.

Are single stocks or ETFs better for diversifying?

An ETF is a fund that invests in many stocks at once. With one purchase you are already diversified. With single stocks you must arrange the spread yourself, and you often pay more in transaction costs. With an ETF, do look at costs and what it holds.

How often should I rebalance?

You can do it at a fixed time, for example once a year, or when a part drifts too far from your plan. Allow for the costs of buying and selling. Choose a rule in advance and stick to it.

Portfolio Basics: Spreading Risk With Diversification

Diversifying means dividing your money across several investments, so one bad outcome does not hit your portfolio too hard. It does not prevent losses, but it can limit the damage from a single miss.

Why diversify?

Take € 10,000 and two ways to invest it:

Everything in one stock. If that stock falls 50%, you lose € 5,000, which is 50% of your portfolio.
Spread over 10 stocks, € 1,000 each. If one stock falls 50%, you lose € 500, which is 5% of your portfolio.

The chance that one company disappoints is the same. The effect on your portfolio is much smaller. So diversifying reduces the risk of a single company, but not the risk that the whole market falls.

Ways to diversify

Across companies: several stocks instead of one.
Across sectors: for example technology, healthcare, energy and food.
Across regions: your home country, Europe, other parts of the world.
Across types of investment: stocks, bonds and savings.
Across time: investing your money in parts instead of all at once. Try this with the DCA calculator.

An ETF as an easy way

An ETF is a fund traded on an exchange that often invests in many companies at once. With one purchase you already have a spread. Do look at the costs, at what exactly is in it and at the risks, such as currency differences.

False diversification

Diversifying only works if your investments do not all move the same way at the same time. If you hold 10 stocks from the same sector, they can fall together on the same news. You then have little real diversification. Look at sector, region and type of investment. This is called correlation: how much investments move together. You can read more about risk per position in Risk Management: The Basics.

Too much diversification

Too many different investments can also be a problem. You get a portfolio that is hard to follow, and the extra diversification keeps getting smaller. Costs can add up as well.

Your mix: an example

Your mix of stocks, bonds and savings is called your asset allocation. The right mix depends on your goal, how long you want to invest and how much ups and downs you can live with.

For illustration, not advice: someone decides to invest 70% in equity ETFs and 30% in bonds. With € 10,000 that is € 7,000 and € 3,000. More stocks usually means bigger swings. A rule of thumb based only on your age is too simple.

Rebalancing

Over time, parts grow at different speeds, so your mix drifts. Rebalancing means bringing your mix back to your plan.

Example: you start with € 7,000 in stocks and € 3,000 in bonds (70/30). The stocks rise 20% to € 8,400, and the bonds stay at € 3,000. Together that is € 11,400, and stocks are now 73.7%. To get back to 70% you sell € 420 of stocks and buy € 420 of bonds. That keeps the risk you chose.

You can do this at a fixed time, for example once a year, or when a part drifts too far. Allow for transaction costs.

Common mistakes

Everything in one stock or one sector.
Holding many positions that all do the same thing.
Investing only in your own country or your own employer.
Buying investments because they did best last year.
Ignoring the costs of funds and transactions.

Step-by-step plan

Decide your goal and how long you want to invest.
Choose your mix of stocks, bonds and savings.
Within stocks, spread across sectors and regions, for example with ETFs.
Check that your investments do not all do the same thing.
Choose a fixed rule for rebalancing and note your choices in a trading journal.

Work it out yourself

Open the full calculator →

Test yourself

Practice questions to check your understanding, not advice.

You have € 10,000 spread over 10 shares of € 1,000 each. One share falls 50%. What percentage of your portfolio do you lose?
- 5%
- 10%
- 50%
Show answer
Answer:A. 5%
One share of € 1,000 loses 50% = € 500. That is 5% of € 10,000. With everything in one share it would have been 50%.
Diversification mainly reduces which risk?
- The risk that the whole market falls
- The risk of a single company
- The risk of costs
Show answer
Answer:B. The risk of a single company
Diversification reduces the risk of a single company, but not the risk that the whole market falls.
You hold 10 shares, all from the same sector. What is the problem?
- You have too few costs
- You may hold at most 5 shares
- They can fall together on the same news, so you have little real diversification
Show answer
Answer:C. They can fall together on the same news, so you have little real diversification
This is called false diversification. Correlation is the degree to which investments move together. So look at sector, region and type of investment.
Your mix is € 7,000 shares and € 3,000 bonds. The shares rise 20% to € 8,400, the bonds stay at € 3,000. What must you do to return to 70/30?
- Sell € 420 of bonds and buy shares
- Sell € 420 of shares and buy € 420 of bonds
- Nothing: 70/30 stays by itself
Show answer
Answer:B. Sell € 420 of shares and buy € 420 of bonds
Together it is € 11,400; 70% of that is € 7,980. Shares are € 8,400, so you sell € 420 of shares and buy € 420 of bonds.
What do you call your mix of shares, bonds and savings?
- Correlation
- Rebalancing
- Asset allocation
Show answer
Answer:C. Asset allocation
Your mix of shares, bonds and savings is called your asset allocation. Rebalancing is bringing that mix back to your plan.

Frequently asked questions

How many stocks do I need to be diversified?: There is no fixed number. More different stocks reduces the effect of any one company, but the number is not everything. Ten stocks from the same sector diversify less than four from different sectors. A fund or ETF often holds hundreds of stocks in one product.
Should I also invest outside my home country?: If you invest only in companies from one country, you depend heavily on a single market. Investing in several regions can reduce that. It does bring other risks, such as currency differences. How much fits depends on your goals.
How do I split my money between stocks and bonds?: No split suits everyone. It depends on how long you want to invest, how much ups and downs you can live with and what your goal is. A split with more stocks can swing more. A rule of thumb based only on your age is too simple.
Are single stocks or ETFs better for diversifying?: An ETF is a fund that invests in many stocks at once. With one purchase you are already diversified. With single stocks you must arrange the spread yourself, and you often pay more in transaction costs. With an ETF, do look at costs and what it holds.
How often should I rebalance?: You can do it at a fixed time, for example once a year, or when a part drifts too far from your plan. Allow for the costs of buying and selling. Choose a rule in advance and stick to it.