Having a diversified portfolio is essential to both growing wealth and avoiding losses in the stock market. But what exactly does a diverse portfolio entail? At a minimum, you should aim to invest in a dozen different stocks, ideally from an array of market segments. But the more stocks you own, the greater your chances of making money in your portfolio and steering clear of losses when the stock market crashes.
Of course, buying stocks is an involved process. You'll need to research each individual company you're interested in, figure out how it makes money, assess its cash flow management, and make sure it offers distinct value or growth potential. And you may not have the time -- or desire -- to put in that amount of effort. Or you might be too nervous to pull the trigger on individual stocks, even despite of your research.
If that's the case, here's some good news: You can actually assemble a well-diversified portfolio without spending hours upon hours doing research. In fact, you can get the job done in just a few minutes with one easy move.
Your ticket to instant diversification
A diverse portfolio could be yours if you buy S&P 500 index funds. If you're not familiar with index funds, they're passively managed funds that aim to track the performance of the market index they're tied to. In the case of S&P 500 index funds, you're effectively investing in the 500 largest publicly traded companies with a single purchase. And it really doesn't get more diverse than that.
Best of all, buying S&P 500 index funds takes a lot of the guesswork out of investing. When the broad market goes up, so will your portfolio. When the market declines, your portfolio will take a hit, but that hit will be right in line with the way the S&P 500 is performing. You won't have to sit there second guessing yourself, wondering whether you chose a single bum investment that needs to be dumped.
Also, because index funds are passively managed, they don't come with the hefty fees associated with actively managed mutual funds, where a fund advisor actually makes hands-on investing decisions. As such, they're a cost-effective option for investors at all income levels.
Is an S&P 500 index fund right for you?
If there's one downside to buying index funds, it's that you get no say as to which stocks you own. In the case of S&P 500 index funds, any stock that's part of that index will be a stock you end up owning a piece of. Also, index funds aren't designed to beat the broad market. If you want your portfolio to generate a return that exceeds that of the S&P 500 over time, then you'll need to handpick stocks, instead.
But if your goal is to put together a diverse portfolio without investing a lot of time, then it pays to look at S&P 500 index funds -- both in your regular brokerage account, as well as your retirement savings plan.