If you've ever read anything about investing, you probably know how important diversification is. Diversifying your portfolio means you spread your money around so you don't put all your eggs in one basket. It allows you to avoid catastrophic outcomes if one or two investments perform poorly, and it maximizes the chances your portfolio will do well over time.
In the past, though, there was just one problem: Diversification required quite a bit of money. That's because buying shares of multiple different stocks could come at a big cost. Now, however, fractional shares have made diversification easy.
Fractional shares allow you to buy portions of shares of exchange-traded funds (ETFs) so you don't need to pay the price of a full share to invest in an asset. ETFs pool your money with other investors and use the big pot of cash to buy assets that share common traits. They trade like stocks, and generally have very low fees, which makes them a great option for investors without a lot of money or investing knowledge.
Many major brokerages are offering fractional shares of ETFs now, and thanks to this new investing solution, you can actually build a diversified portfolio with just a $5 investment each week for five weeks. Here's how.
How to build a diversified portfolio with a $5 weekly investment
To build a diversified portfolio, you should ideally gain exposure to a mix of different assets. For example, you may want to buy stock in large companies and small companies, purchase bonds, invest in emerging markets, and even gain exposure to real estate.
The good news is, there's a really easy and affordable way to do that: You can buy ETFs that give you exposure to all of these different kinds of investments. For example, you could buy the following five ETFs:
- Schwab US Large-Cap Growth (NYSEMKT:SCHG)
- Schwab US Small-Cap (NYSEMKT:SCHA)
- Schwab Emerging Markets Equity (NYSEMKT:SCHE)
- Vanguard Total Bond Market (NASDAQ:BND)
- iShares Dow Jones U.S. Real Estate (NYSEMKT:IYR)
The only problem is, buying into all of these ETFs could be costly. In fact, the large-cap growth fund alone would set you back more than $100 for a single share, while the others have prices ranging from just over $20 to over $80 per share. Amassing enough money to buy all of them used to take time -- but that's no longer the case since fractional shares mean you don't need to buy a full share to make an investment.
In fact, if you have just $5 per week (or less), you can buy partial shares of each of these ETFs. If you start with SCHG and buy about .045 shares of the stock with your $5, you can then pick up about .070 shares of SCHA the next week, and so on down the line until you've bought a fractional share in each and are fully diversified for just $25 in just five weeks.
Of course, you don't have to pick these five particular ETFs. You could choose others, or buy a small stake in several companies and build a diversified portfolio by picking individual stocks across different industries. The important thing is, because of fractional shares, you aren't limited in what you buy -- you can do your research, find a mix of investments that work for you, and not have to worry about their share prices preventing you from purchasing them.
Get your money into the market ASAP
With fractional shares making it easier than ever to diversify, the risk of investing small sums of money has dropped. If you have just a little bit of cash, you can get started buying stocks or ETFs now and get to work on building a well-rounded portfolio that hopefully will perform well for you over time.