What’s best is what works for you. There’s no universal best. If you think you’re spending too much time maintaining all your books on your reader, that already eliminates one of your options. Either of the other two seems reasonable and probably comes down to how much rereading you do.
To answer the personal question, no, I don’t keep all my books or even all my unread books on my reader. I keep a largish selection of books across various categories on my reader and choose among them for my next read; occasionally I change it up.
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