Portfolio management

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7. Diversification: shares

How many separate shares should you hold to get the best balance between risk and return?

Some investment primers suggest holding no more than 3 to 5. This may be fine for experienced investors. But it allows beginners little leeway for mistakes. You will get a very nasty shock if you put up to one-third of your money into a single share and the company then goes bust.

At the other extreme, a lot of investors hold far too many shares. They buy indiscriminately because they are nervous or indecisive. They may well end up with a portfolio of 25 or more shares. This is far too many to keep proper tabs on. Soon they find they are missing items of bad news that are knocking the price of this share or that. And if they do get a big winner, their holding is too small to make a real impact on their returns.

Avoid both these extremes. If you are feeling your way into your first portfolio, the optimum number of shares for you is somewhere between 5 and 10.

This will give you the benefits of adequate diversification, while still allowing you to profit significantly from your big winners. You should try to buy at least £2,000 worth of each, to keep your costs down to a reasonable proportion of your total portfolio value.

• If you start with less than £10,000 of capital, buy unit or investment trusts rather than shares.
• If you start with £15,000 or more try to buy more than 5 shares, always provided you can come up with enough good ideas. Otherwise, stay in cash.
• As you gain in confidence, you should be able to restrict the number of your holdings to just the very best prospects - perhaps 3-5 shares.

1. First things first 2. Should you invest before paying off your mortgage? 3. Do you want growth or income? 4. Diversification: summary 5. Diversification: Safe custody 6. Diversification: asset allocation 7. Diversification: shares 8. Diversification: sectors 9. Diversification: countries 10. Balancing your portfolio 11. What should you hold where? 12. Tips for married couples 13. Lump sum or drip feed? 14. The role of cash 15. Rebalancing your portfolio 16. What to do with dividends 17. All about bonds 18. What to do if you inherit a portfolio 19. Benchmarking performance 20. Setting up a portfolio spreadsheet 21. Conclusion

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