Whether you're new to investing or have been at it for years, having a diverse portfolio is important for a couple of reasons. First, it can open the door to wealth-building opportunities over time. Second, it can protect you during periods of stock market volatility.
But how exactly do you build a diverse portfolio? Here are a few tips for pulling one off.
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1. Hold different types of investments
Younger investors are often told to favor stocks over bonds because they offer more growth potential. Similarly, near-retirees are often told to shift away from stocks and focus on bonds as a safer alternative. But in reality, your portfolio should contain a mix of investments at every stage of life, albeit with a shifting emphasis on certain asset classes over others, depending on your age.
Say you're in your 40s and midway through your career. You might decide to load up on stocks, bonds, and real estate investment trusts (REITs), which trade like stocks but come with specific rules that make them a different type of asset.
2. Diversify within each asset class
In addition to holding different types of investments in your portfolio, you should also aim to diversify within each class. For example, if you're going to buy stocks, don't just load up on tech stocks and call it a day. Rather, expand your horizons. Buy bank stocks, auto stocks, and energy stocks, as well.
Similarly, if you decide to dabble in REITs, there are different kinds to choose from. You could look at industrial REITs, which operate warehouses and distribution centers, mall REITs, or office REITs.
Bonds work similarly. You can buy bonds issued by companies from different market segments, or you can invest in a mix of corporate and municipal bonds, which are issued by states, cities, and other localities.
3. Load up on index funds
When you buy individual stocks or bonds, you really have to research each investment individually. When you buy index funds, you still have to look into the funds you're investing in, but a small amount of research could help you add dozens of stocks or bonds -- or more -- to your portfolio in one fell swoop.
Index funds are passively managed funds that aim to match the performance of the market indexes they're associated with. An S&P 500 index fund, for example, will attempt to mimic the performance of the S&P 500 itself. Index funds allow you to enjoy broad market exposure minus the legwork you might otherwise put in to diversify your holdings, and they're a good bet if you're willing to relinquish a bit of control over your investments (since you don't actually get to choose the companies that go into the funds you buy).
A diverse portfolio could be your ticket to a successful investing career. And remember, it never hurts to check up on your investments and dabble in new market segments as your knowledge and confidence grow. Even if you think you're diversified enough at present, you may want to reassess and throw a few more investments into the mix.
