Please ensure Javascript is enabled for purposes of website accessibility

Here's How to Diversify Your Portfolio With a Single Investment

By Maurie Backman - Mar 28, 2021 at 5:36AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You don't need to spin your wheels to diversify your holdings.

You've probably heard time and time again that it's important to diversify your portfolio. The reason? Holding a diverse mix of stocks can help you capitalize on broad market gains.

At the same time, diversifying your holdings can help you avoid major losses during periods of stock market volatility. Similarly, diversifying protects you in the event a specific market segment takes a beating. Say regulatory changes come through that specifically impact bank stocks. If you own a disproportionate number of those, your portfolio could take a huge hit.

Of course, the problem with diversifying is that it could, in theory, require more legwork. After all, it's easier to research and buy two or three stocks than it is to assemble a portfolio of a dozen different companies or more. But if you're eager to diversify without putting in a ton of time and effort, here's a good solution for you -- index funds.

Smiling man at laptop

Image source: Getty Images.

Why index funds really pay

Index funds are, in a nutshell, a hands-off investor's dream. With index funds, you don't have to spend hours researching companies one by one. Instead, a single investment will buy you a bucket of stocks that lend to instant diversification.

Index funds track existing market indexes. You may have heard of the S&P 500 index, for example. Well, S&P 500 index funds have the goal of matching the performance of the S&P 500 itself. If you buy S&P 500 index funds, you'll effectively be invested in 500 different companies -- but without having to make 500 unique transactions.

Furthermore, index funds are a good investment option if you don't want to continuously have to tweak your portfolio through the years (though checking in quarterly is definitely advised). Since the performance of index funds is tied to the broad market, there's really not much for you to do other than sit back and see how they perform.

Now, one drawback of index funds is that they won't help you beat the market. If you want your portfolio to outperform the S&P 500, for example, then S&P 500 index funds won't do that trick. But if you're content with the idea of matching the broad market's performance, index funds are a good bet.

Of course, index funds also don't let you choose your investments. You may get stuck with some companies in your portfolio that you're just not a fan of. For example, some people really don't like tobacco companies, but if you buy S&P 500 index funds, you might get stuck investing in that industry whether you want to or not. But if you favor convenience over control, then index funds are a good choice for you.

No matter your age, income level, or risk tolerance, having a diverse portfolio is crucial for both maximizing growth and mitigating losses through the years. Index funds let you accomplish that goal, so they're worth considering if you want a truly easy way to diversify your holdings without taking on undue risk.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.