Investors aiming to achieve long-term financial goals can enhance their chances by diversifying their portfolios. If your stocks are spread across demographics, geographies, and industries, a downturn in one area may be balanced out by an upturn in another.
For instance, a unified global increase in taxes on carbonated beverages with sugar may hurt sales at Coca-Cola and PepsiCo. However, if you had Starbucks in that same portfolio, the decrease in soda consumption may be offset by increasing coffee consumption. That's just one of the many ways a portfolio can benefit from diversification.
How many stocks create a diversified portfolio? That depends on how closely related the stocks in your portfolio are. The more unrelated your stocks, the fewer you can hold and maintain diversification. Still, you want to aim to have at least 20 stocks to gain most of the benefits. Here are five growth stocks to start you off.
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1. Roku
Roku (ROKU +3.84%) offers a platform that connects TVs to streaming services. The company sells players that connect to TVs, and it licenses its software to TV manufacturers who make it the default operating system. Roku benefits from the trend of folks canceling traditional cable subscriptions and moving to streaming instead. The big moneymaker for Roku is showing advertisements to folks spending time on the platform.
Roku also has its own streaming channel free to users of the platform and generates revenue from showing advertisements on the Roku channel.
The company's revenue has accelerated over the last three fiscal years, from 44.8% to 52% to 57.5% in fiscal 2018, 2019, and 2020.
2. DraftKings
DraftKings (DKNG 3.88%) provides daily fantasy sports wagering, mobile sports betting, and iGaming primarily in the U.S. The company is catching a wave of legalization across the U.S., making its service available to more customers. The trend has boosted revenue by 17.9%, 42.9%, and 90% in the last three fiscal years.
Adding DraftKings to Roku diversifies a portfolio by adding two different categories together. Not all people are inclined to wager on sporting events. It's certainly a smaller group than are willing to stream content.
Image source: Getty Images.
3. Roblox
Roblox (RBLX 0.17%) is an online platform that allows players to create avatars that can interact with each other and the online environment. The company's site is free to join, and Roblox makes money by selling in-game currency. It is popular with kids 13 and under, with nearly 50% of its daily active users under that range.
This is another supercharged growth stock that grew revenue by 56.4% and 81.7% in the previous two years, which is all the data available. Adding Roblox to the portfolio diversifies through target demographic. Most Roblox players are not old enough to wager on sporting events, which has a minimum age requirement of 18 or 21, depending on the jurisdiction and game.
4. Pinterest
Pinterest (PINS +0.00%) is an image-based social media app that folks go to for inspiration and ideas. It, too, is free to join and earns revenue by showing advertisements to users spending time on the app. That makes it slightly similar to Roku in that they both rely on advertising sales. However, it's vastly different from Roblox and DraftKings. Pinterest has increased revenue by 59.9%, 51.2%, and 48.1% in its last three fiscal years.
Moreover, Pinterest has a strong international presence, with 363 million of 454 million monthly active users from overseas. So if for any reason marketers desire to get the attention of folks outside the U.S., Pinterest will reap the benefits. As of now, marketers prefer the attention of people in the U.S. That's understandable. The average income of an individual in the U.S. is higher than in most countries outside. However, that may not always be the case. Investors owning Pinterest can have a component in their portfolio that will benefit should there be a shift.
5. Peloton
Peloton (PTON +1.49%) manufactures and sells interactive exercise equipment. The company sells exercise bikes and treadmills, and it creates live exercise classes that folks pay a monthly membership fee to access. Peloton increased revenue by 110.3%, 99.6%, and 120.3% in fiscal 2019, 2020, and 2021, respectively.
Peloton diversifies your portfolio because the factors that cause people to buy exercise equipment are different than the other stocks mentioned. It has little overlap. For instance, Roblox's users tend to be younger kids around 13 years old. They are unlikely to purchase or even use Peloton equipment. Moreover, people who are the highest value customers of Roku are not likely to be exercising often enough to warrant a purchase of a Peloton bike. They probably prefer spending their free time watching movies or shows instead.
Investor takeaway
Even though the five stocks above do not complete a diversified portfolio, they all vary in some way, shape, or form. Therefore, they could create offsetting economic effects, lowering portfolio risk. In the end, you are more likely to hit your financial target with a balanced approach. The five companies mentioned above give you a good start for those looking to start a diversified portfolio of growth stocks.
