You know its a bad idea to pour your lifes savings into a single investment.
Its personal finance 101: Invest regularly and diversify your portfolio.
But a lot of times, there isnt much guidance beyond that.
So as an investor, youre left wondering: How do you know if your portfolio is diversified?
How many investments do you need in a diversified portfolio?
Stick around and well discuss those later.
No Interest Til Almost 2027?
What happens when the stock market crashes?
The idea behind diversifying is to play defense.
But the goal goes beyond risk management.
Of equal importance, however, is positioning yourself to capture opportunity when and where it occurs.
Did you know?
Sounds simple so far?
Were just getting started.
To have a diverse portfolio, youd need the following.
But growth stock is also risky.
Investing in giant corporations offers slow and steady returns but less potential growth.
Government bonds are among the safest investments, but they still have risk.
The interest they pay is so low that your investment might not keep up with inflation.
To achieve diversification, you dont want all your investments to rise and fall with the stock market.
For example, sales at discount stores often rise during recessions and their share prices often increase altogether.
Many investors diversify by going outside the stock and bond markets by buying different asset classes.
They might invest in commodities like gold, which usually increase in value during downturns.
Or theyinvest in real estate, which is usually less volatile than investing in stocks.
Heres how to diversify in the simplest way possible.
The majority of ETFs and some mutual funds areindex funds.
You dont necessarily need to own a lot of ETFs or funds to be diversified, Jessee said.
These are known as total market funds.
You typically want to invest mostly in stocks when youre young.
Then, you allocate more toward bonds when you cant afford as much risk.
Reviewing your asset allocation once a year with a financial pro is well worth the cost.
Its also fine to invest in individual stocks when youre diversifying but caution is required.
Youll get greater diversity than youd get by picking individual stocks in the same industry.
Just be careful not to invest too much in a single sector.
Dont Assume More Is Better
Many investors mistakenly think investing in more funds helps them diversify.
But a lot of these funds have the same underlying investments, meaning you arent getting more diversification.
you’re free to often achieve your goals with a single fund or two.
Overall portfolio performance is unrelated to the number of funds in a
portfolio, Sadler said.
What matters is the number of underlying stock and bond holdings, their weighting and their characteristics.
Automate Your Investments
Theres a way to make portfolio diversification even more brainless, which is to automate things.
One way is by investing in a target-date fund.
It is basically a one-stop-shop fund.
But dont think of investing as trying to pick the person who becomes MVP.
Wang suggests treating your portfolio like a team of players, each of whom has different strengths and weaknesses.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder.
She writes the Dear Penny personal finance advice column.
Send your tricky money questions to[email protected].
(Can you sense my millennial sarcasm there?)
You know which ones were talking about: rent, utilities, cell phone bill, insurance, groceries…
