Just a Few Good Funds - Or Stocks - Will Do

John Murphy, a buyer of corporate aircraft in Pflugerville, Texas, owns stock in 16 different companies and has money in eight mutual funds.

Anne Carey, a political science teacher at a community college in Birmingham, Ala., owns shares in eight stocks and 10 mutual funds. Her holdings are highly diversified, including bonds and international funds as well as domestic stocks. Sometimes she gets angry at a particular company. "One stock made me so mad I went out and sold it, and you know, it turned around and doubled [in price] right afterwards," she says.

Clearly, there is no right or wrong answer to the question, "how many?" The number of stocks or funds you buy into will vary based on your income, family responsibilities, and temperament, among other factors. But investment experts find agreement on some ground rules:

*Fewer may be better than more, experts say. The discipline of keeping your portfolio slim may help you put extra money into promising stocks or funds and move out of ones showing problems. This strategy works especially well if your money is in a tax-sheltered retirement account, where you won't incur a capital-gains tax for selling appreciated shares.

*Still, you need enough stocks or funds to ensure true diversification - between different industry sectors, US and overseas companies, and categories of investing, such as stocks, bonds, and cash. (Cash is usually held in a money-market mutual fund or bank account.)

*Buy for the long term, and use "dollar-cost averaging," where you invest equal sums of money every month. That strategy protects you from putting all your investment into a stock or fund at a peak.

Own only as many stocks and mutual funds as you can safely monitor, says Thomas O'Hara, chairman of the National Association of Investors Corporation (NAIC), an investor's group in Madison Heights, Mich. The task doesn't need to be a full-time job.

"We tell our members that they really don't need an awful lot of time for their investing," Mr. O'Hara says. "You could do very well with 20 to 25 hours of study a year," which works out to perhaps two hours a month. That would include reading newspaper business pages as well as investment literature.

For people who want to invest in individual stocks rather than mutual funds, O'Hara offers a rule of thumb: A novice investor, or a person with less than $20,000 of investment income, might want to own four or five stocks. With $40,000 or so, 20 stocks might be appropriate. He cautions against adding a lot of additional companies if your investment money is more than $40,000. You might add just a few more stocks, but focus on quality more than quantity, he says.

For beginners, there's no substitute for jumping in and practicing, O'Hara adds. "You need some [market] activity to capture your interest and attention."

If you own just a handful stocks, can you be properly diversified? Yes, says stock broker Steven Camp. Once you have shares in 10 companies, if they are chosen in a variety of industry groups, adding more stocks will do little to increase your diversification, he suggests.

"Watch out for duplication, or even triplication," with your stocks, says Mr. Camp, who recently wrote and published the book, "Money: 127 Answers To Your Most Asked Financial Questions." (The book is available in some bookstores, or by calling 800-356-9315.)

Still, Camp recommends not having more than 10 percent of your investment assets in any one company or industry. As for international diversification, he prefers American companies that capture some sales and earnings from overseas. General Motors, Boeing, Coca-Cola, and McDonald's are examples.

With mutual funds, diversification can come easily. The Vanguard Index Trust - Total Stock Market, for example, is an "index" fund that represents a broad cross-section of US stocks, including large and small companies.

"What you buy will in large part depend on how much money you have to spend," says Tim Schlindwein, a principal at Schlindwein Associates, a Chicago financial firm. He notes that buying into a mutual fund can be expensive: Most funds require an initial investment of $2,000 or more. Thus, if you have $10,000 or less, you might own four or five funds, he says.

But let's say you have much more money - perhaps $50,000 to $100,000.

Mr. Schlindwein says you might want to own a maximum of 28 funds. That would include nine US equity funds, nine international funds, and nine fixed-income (mostly bond) funds. You would also need a money-market fund for a cash position.

With this many funds, each could be specialized in areas such as small-company stocks, European stocks, or high-yield bonds. The specific funds would depend on your investment goals, temperament, and age, Schlindwein says.

Ms. Carey is already thinking of adding new funds. One might be an index stock fund, to track the performance of the overall market. Another could be a small-company or other "super aggressive" fund with the potential for above-average returns. This would shift the stock-picking work and costs to a mutual-fund company.