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3 Ways to Diversify Your Investments When Money Is Tight

By Maurie Backman - Updated May 26, 2021 at 10:16AM

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Need a wider range of stocks in your portfolio? Here's how to pull that off on a budget.

You'll often hear that having a diverse portfolio could be your ticket to not only growing wealth in the stock market, but also protecting yourself during periods of volatility. To diversify, you could go out and load up on a whole bunch of different stocks.

But what if money is tight and you're limited in how much you can invest? If that's the case, here are a few options to consider.

1. Buy exchange-traded funds

Exchange-traded funds, or ETFs, allow you to own a bucket of stocks with a single investment. There are different ETFs you can choose from, but those that aim to match the performance of the S&P 500 are a solid bet.

The S&P 500 index, as the name implies, consists of 500 different companies, which means investing in it lends to instant diversity. The index also has a history of strong returns and is a good way to effectively invest in the broad market without having to do a lot of research.

The Vanguard S&P 500 ETF (VOO -0.09%) is a good starting point in this regard. Not only does it charge very low fees, but it's also delivered a 15.74% return, on average, since its inception in 2010. That said, there are many S&P 500 ETFs out there, so you can compare different funds' fees and performances to land on the right one for your portfolio.

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2. Look at fractional shares

Some companies have stock prices that cost hundreds or even thousands of dollars for a single share. If that doesn't work for your investing budget, it pays to look at fractional shares instead.

Fractional shares allow you to purchase a portion of a share of stock if you can't pay for a full share or don't want to tie up so much money in a single share. Many brokerages these days support fractional investing, so if there are market segments you feel aren't represented well in your portfolio, you can use this option to branch out.

3. Choose the right brokerage

There are plenty of low-cost stocks with solid growth potential. But if you waste too much money on fees and commissions, you won't be able to afford as many of them.

If you're on a budget, having the right brokerage account is crucial if you're looking to build a diverse portfolio. Specifically, you should aim for a brokerage that won't charge a commission on each trade you make. You may also want to look for a brokerage that won't charge you for not making enough trades.

The more diverse your portfolio is, the more opportunities you'll have to grow your wealth. At the same time, diversification is often the ticket to riding out stock market crashes, especially since some sectors can get hit harder than others.

The good news is that you don't need a ton of money to assemble a diverse portfolio. You just need to choose the right brokerage account and load up on affordable investments that lend themselves to that goal.

Maurie Backman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

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