Here’s a question that I’ve myself on more than one occasion.

The answer comes from something I read by William J. O’Neil in the Investor’s Business Daily of Monday, March 11, 2013

By limiting yourself to a smaller number of investments, the stocks making powerful advances can have a bigger impact on your portfolio.
“Broad diversification is plainly and simply often a hedge for ignorance,” says William J. O’Neil.

There are better ways to protect yourself. One main rule is the 7% or 8% sell rule, which states that investors should always sell a stock when it drops 7% or 8% below their purchase price — no exceptions, no hesitation.

If you have a relatively modest account with $3,000 in it, then William J. O’Neil recommends limiting yourself to two stocks.

For an account with $5,000 to $20,000, three stocks might be a reasonable maximum.

He suggests going up to four or five names when you have $20,000 to $200,000 to invest.

You should “muster the discipline to sell your least attractive investment” before pursuing that new “tempting situation,” O’Neil says.

“The big money is made by concentration, provided you use sound buy and sell rules along with realistic general market rules. And there certainly is no rule that says that a 50-stock portfolio can’t go down 50%or more.”