How to cut your risk and simplify your stock purchase

— -- Q: What stock or handful of stocks would you buy now and hold for the rest of your life?

A: Seems the quest for that "one stock" or "handful of stocks" to buy and keep forever is back.

Perhaps something about the simplicity of owning just five stocks that appeals to investors. Maybe it's the idea that by owning just a few stocks, you reduce your chances of owning a company that does poorly. But every once in awhile I get lots of questions from readers looking for a magical short list of stocks to buy.

What I'd like to suggest is instead of trying to buy as few stocks as possible, you should buy as many as possible.

Yes, that's right. By owning smaller slices of many companies, you can spread your risk. By owning more stocks, instead of fewer, you can greatly reduce your risk that any one company will suffer unique problems.

Increasing the number of stocks you own means that you narrow your chief risk to what's called systematic risk, that is, the risk that all stocks will fall. And if the past two years have proven anything, systematic risk has been more than enough for most investors. Why heap company-specific risk on top of it?

You might be wondering about the logistics of owning all sorts of stocks. Won't trading commissions be high? What about managing a bigger portfolio? Well, thanks to mutual funds and exchange-traded funds (ETFs), those are not a concern.

Some critics of this index approach might argue if you're willing to put in the research, you can greatly reduce your exposure to company risk by owning seven to 10 individual stocks. And it's true that 10 stocks will have less business risk than one. But why settle for 10 stocks when you can own 500?