The Portfolio with Twenty-Three Positions That Was Performing Like an Index Fund
A subscriber once asked me to review their portfolio. Twenty-three open positions. Every one of them a legitimate business — strong earnings, reasonable valuations, credible growth stories. The research behind each one was thoughtful and clearly work they had put genuine time into.
When I looked at the portfolio performance over the previous twelve months, the result was almost exactly the index return — not better, not worse. The twenty-three positions had collectively averaged out to the same result the investor could have achieved by putting everything into a single low-cost index fund and doing nothing.
This was not a coincidence. It was mathematics. Twenty-three positions means that even if the three best selections each advanced 40%, those gains represented less than 5% of the total portfolio each. The impact on the overall result was small. The positions that performed poorly had equivalent weight and dragged the result back toward average. The investor had done extraordinary amounts of work to produce an ordinary result — because the number of positions had prevented the best ideas from making a meaningful difference.
The question is not how many positions eliminate risk. The question is how many positions allow the best ideas to produce results that are meaningfully different from the index. The answer is three to six.
The Three Position Count Zones
One or two positions creates binary outcomes. A single failed trade at 7% stop-out represents 7% of the entire portfolio if one position, 3.5% if two. Acceptable on paper but psychologically almost impossible to manage — the stakes on any individual decision are so high that the decision-making quality deteriorates. Single-position portfolios also have no sector diversification whatsoever.
Three to six positions allows the best ideas to be meaningfully sized while providing sufficient diversification across sectors. A 7% stop-out on a single position represents 1.2% to 2.3% of the total portfolio — a manageable loss that does not require recovery before the next entry. Enough positions to represent multiple sectors. Few enough that each deserves and receives genuine attention every Friday. The sweet spot between concentration and dilution.
Ten or more positions means the best ideas cannot move the portfolio materially. A 25% gain on a position that represents 4% of the portfolio is a 1% portfolio gain — barely visible in the overall result. Ten positions across different sectors begins to approximate the index. Twenty positions effectively is the index, without the fee efficiency of an actual index fund. All the work of individual stock analysis with none of the upside it is supposed to provide.
A restaurant with four hundred items on the menu does not give diners better options than a restaurant with twenty. It gives them decision paralysis, inconsistent food quality, and a kitchen that cannot execute anything particularly well because it is stretched across too many dishes. The restaurants with the best reputations typically serve fewer dishes with exceptional execution on each one. A portfolio works identically. More positions does not mean better diversification — it means less conviction, less monitoring quality, and results that converge toward the average. The investor who selects three to six positions with genuine high conviction and correct sizing is running the four-dish restaurant. The investor with twenty-three positions is running the four-hundred-dish menu. The effort is higher. The quality per dish is lower. The overall result is worse.
Same 30% gain on the best position. Five-position portfolio: the gain moves the needle by 6%. Twenty-position portfolio: the same gain moves it by 1.5%. All the work of selecting the right stock, producing a quarter of the portfolio impact. For illustrative purposes only.
The purpose of position sizing is not to eliminate risk through dilution. It is to size each high-conviction position large enough to make a meaningful difference when it is right — and small enough that it cannot do serious damage when it is wrong.
Why Three to Six Is the Right Number
Three to six positions provides meaningful diversification across sectors — with three, each position can represent a different sector; with six, two sectors can be represented with two positions each. This is sufficient sector diversification for a focused portfolio. It does not protect against a broad market decline — nothing in a long-only equity portfolio does — but it prevents single-sector concentration risk from producing catastrophic outcomes.
Three to six positions is also the number that a retail investor with a full-time occupation can genuinely monitor. Each open position requires a weekly review: is the stop still correctly placed? Has the price action this week changed the stop level? Is the position approaching its first target? Is there a reason to add to the position? Three to six of these weekly reviews takes fifteen to thirty minutes. Ten or more becomes a burden that degrades the quality of each individual review.
Finally, three to six positions produces portfolio impact that makes the work worthwhile. A 20% gain on a position representing 20% of the portfolio is a 4% portfolio gain. That is meaningful. A 20% gain on a position representing 4% is 0.8%. That is noise. The three-to-six range is where individual stock analysis produces results that actually differ from the index — which is the only reason to do individual stock analysis rather than simply owning the index. Past performance does not guarantee future results.
→ How to Calculate Maximum Loss Before Entering a Trade
→ How to Assess Risk and Reward Before Entering a Trade
→ The Full Position Sizing Framework
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Send Me the Friday FlashFrequently Asked Questions
Yes, with one practical adjustment. For very small portfolios — below approximately $10,000 — transaction costs and the minimum trade size of individual stocks may prevent equal-weighting across six positions without making any single position too small to matter. In that case, three or four positions with appropriate sizing is more practical. For larger portfolios — above $100,000 — the three-to-six range remains optimal but the upper end of the range becomes more appropriate as the absolute dollar size of any individual position becomes large enough that single-stock risk warrants slightly broader distribution. The principle — that each position must be large enough to make a meaningful difference when it works — holds regardless of portfolio size. Past performance does not guarantee future results.
Yes. A position being built gradually through the scaling-in process — an initial entry followed by additions as the position advances — counts as a single position toward the three-to-six total, regardless of how many separate purchase orders were placed. The relevant measure is the number of separate stock positions in the portfolio, not the number of trades that created them. An investor with three positions built through scaling may have placed six to eight separate orders to construct those positions — but they still have three positions and are within the optimal range.
During RED market periods, no new positions are entered. Existing positions are managed through their stops and may be exited as stops are triggered. As positions are stopped out during a RED market period, the portfolio's open position count naturally falls toward zero. This is the correct outcome. An investor who ends a RED market period with zero open positions and full cash has the maximum flexibility to deploy capital the moment the environment shifts GREEN — taking the first two or three best setups with full-conviction sizing. The three-to-six target applies during GREEN and YELLOW environments when new entries are being considered. During RED environments, the correct position count trends toward zero.
Twenty-three positions. Twelve months of careful work. A portfolio that performed identically to an index fund. The investor had not made twenty-three bad decisions. They had made the structural decision to hold too many positions — and that single structural decision had guaranteed that no individual good decision could produce a result meaningfully better than average.
Three positions from the same watchlist, each sized at roughly 20% of the portfolio, each selected with the same quality of analysis — would have produced a result determined by whether those three ideas were right or wrong. Not averaged away. Not diluted into irrelevance. Determined by the quality of the selection.
That is the point of individual stock analysis. To select well enough that the result is different from the average. Twenty-three positions prevents that outcome mathematically before the first trade is placed.
Amateurs add positions to feel diversified. The process-driven investor holds three to six because that is the range where high conviction and correct sizing combine to produce results that actually differ from the index — which is the only reason to do this work in the first place.Every Friday — Five Stocks. Each One High Conviction. Each One Sized to Matter.
The Friday Report publishes five stocks every Friday — the upper end of the optimal range, each selected through the full five-pillar evaluation. Five stocks. Every Friday.
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