With all the financial guidance hoopla focused on ensuring that you are diversified enough, it’s easy to forget about the problem of overdiversification.  I admit that it’s not something I’ve had to think too much about yet as I am still building my portfolio.  But it occurred to me today as I was doing some fall cleaning that having too much stuff makes decision-making more difficult.  If you have 50 options to choose from, you might be left with analysis paralysis.

On the other hand, if you have only four options to choose from, it’s much easier to make a decision.

This is why it feels easier to think in your office once it’s cleaned up and everything is off your desk or out of sight (much better if it’s truly organized and out of sight, of course).  Having stuff lying around is like having a hundred things on your mind at once.  Psychological research has shown that humans are capable of viewing and remembering (in short-term memory) only about 7 things at once.  It’s called subitizing.  Seven is the highest number we can subitize, that is, count visually at a glance.

So I’m thinking it might also help if you used that number seven and employed in in other areas.  Have no more than seven pairs of shoes of all sorts (men might need less), seven sweaters, seven pairs of pants, seven items on your desk, seven things on your to-do list.  Etc.  What do you think?  It’s worth a try.  The number might need to be adjusted slightly higher or lower, but if seven is some kind of natural visual-cognitive limit, it makes sense that it might function that way in other areas of our lives too.

How does this apply to stocks?  Clearly, it’s probably not going to be a good idea to keep only seven stocks if you’ve got a portfolio of $100,000.  But if you have too many stocks, it’s going to be more difficult to keep track of them (not insurmountable, though), and it’s going to take longer to make any one investment decision.  Some of the ishares ETFs only carry about 70 or so stocks.  These have professional managers working at the helm.  I’d advise that you probably shouldn’t carry more than 50 or so stocks yourself unless you can devote much, much more time to it.  I do know one millionaire who manages his own portfolio of more than 100 stocks.  I’m sure it’s doable, but at that point it’s probably a full-time job.

Just like clutter and clothes, you need to weed out the stocks that aren’t working for you anymore.  Check every two years.  Maybe you’ve learned more about your investment options and have thus expanded your working context.  You might know now that you don’t need a stock that you thought you needed.  Or you’ve learned more about one industry and now you know you don’t want to be a part of it.  Whatever it is, get rid of stocks that aren’t working for you - have they cut their dividends?  Are they looking for a buyer?  Is their industry dead?

I admit I haven’t mastered the art of letting go of stocks, however.  So far I’ve only been able to do that with Nortel, and good thing I did let that go.  It never recovered; it was a deadweight in my portfolio.

Are there any stocks you’re still holding on to because you are afraid to sell them?  What size of portfolio are you comfortable with?  I always like to hear another opinion.  Leave a comment below, and don’t forget to subscribe to my feed for more discussion.

This is something I’ve been thinking about off and on for a while now. We’ve all heard that investing should be a purely rational enterprise, unclouded by the bouts of fear and greed that apparently rule the markets on a daily basis. The argument is that it’s this fear and greed that causes so many people to “buy high” when they think they’ve identified a winner and “sell low” because everyone else is selling, too, and so you become insecure and think that maybe there’s a good reason the stock is plummeting.

Well, if that’s all you’re going on and you don’t have much further background knowledge about the stock you’re trading, then the antidote certainly is more information and more education about that stock. But such a trade - selling low, for example, or “holding onto your losers” - was never a non-rational move anyway. You just rationalized based on faulty or insufficient information. This doesn’t make your trade irrational.

But by the same token, I would argue that no investment deal can ever be a non-emotional affair. Your emotions will always be there, it’s just a question of how much attention you pay to them. (OK, you may say, then you should not be paying attention to your emotions when making investment decisions!). Probably what many people mean when they say that your emotions shouldn’t get in the way of your investing is that somehow investing should be a dispassionate affair: you stay cool, calm, and collected throughout it. There may be some merit to staying calm and making only careful, considered purchases, but this doesn’t equate with being dispassionate or disinterested. On the contrary, you have a great interest in your investments. They are your ticket to eventual financial freedom. They represent your hopes for the future. They are your safety in retirement. We can’t be disinterested or dispassionate about these things!

If you like, try relating this to some other activity that requires personal investment over time, such as reading a book, learning to play a new sport or other skill, or blogging. Do you think you can be successful at any of these if you’re not passionate or interested in it? Do you think the person who is most successful at any of these can fail to also be one of the most passionate about that activity? For example, many people online now who are running several blogs for several reasons find that they can only maintain the ones they’re most passionate about. Passion of some sort (not just an empty, externally-imposed sort of discipline) is what’s going to get you out of bed early in the morning and off to the gym on a daily basis.

Can’t we be passionate about our investments too?

If you’re passionate about a particular stock, or a group of stocks, you’re more likely to do the required research on them.

You might be passionate about doing stock research in and of itself. This is not a process of disinterested, cold rationality! You bet your emotions are involved. They can never really be separated from thought. It’s an old myth, like the myth of “left-brain,” “right-brain” thinkers. A nice caricature, but doesn’t ultimately hold water.

If you’re passionate (and if you don’t like the word passionate, try using the words “care deeply” or “are very concerned about” or “very interested in”) about Apple or RIM shares, this gives you good reason to keep up to date on the company and its progress. It’s not a lack of rationality or a preponderance of emotion that contributes to bad investing. These two always go hand-in-hand. It’s a question, I think, of how interested or passionate you are about your investments. or The higher you score on that scale of being very involved in them, the better you will do (all other things being equal, of course). Does this make sense?