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Here's How to Diversify Your Portfolio on a Budget

By Maurie Backman – Nov 20, 2021 at 6:18AM

Key Points

  • A diverse portfolio could be your ticket to growing long-term wealth.
  • Diversifying could also help you get through stock market crashes unscathed.
  • You don't need a lot of money to assemble a healthy portfolio.

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You can build a nice investment mix, even when money is tight.

There's a reason investors are urged to diversify their portfolios rather than rely heavily on a handful of stocks or just one or two market segments. A wide mix of stocks could be the ticket to growing wealth over many years. And just as importantly, having a diverse portfolio could be your ticket to getting through a stock market crash unscathed.

There are different ways you can go out and diversify. And if you have a lot of money at your disposal, you can simply load up on a whole bunch of different stocks and call it a day. But if money is more limited, here are a couple of options to look at.

Person holding tablet with graph on screen.

Image source: Getty Images.

1. Buy fractional shares

It may be the case that there's a specific stock out there that would really lend to a more diverse portfolio for you. But what if its share price is more than what you can afford? Or what if you can afford a share or two, but it would be at the expense of being able to add other companies to your personal investment mix?

If that's the case, it pays to look at fractional shares. Not every brokerage account offers them, but a growing number are making them available.

Fractional shares allow you to buy a piece of a share of stock instead of a full share. Then, when that share gains or loses value, you profit or take losses proportionally.

Say there's a company with a share price of $500, and you only have $250 to invest. You could buy half of a share of that stock, or a quarter of a share of that stock, and then invest your remaining $125 elsewhere. Taking advantage of fractional shares could make it easy to add more individual companies to your portfolio in less time.

2. Load up on broad market index funds

Index funds are set up to match the performance of the benchmarks they're tied to. Because they're passively managed, they generally don't impose anywhere close to the high fees you'll commonly find with actively managed mutual funds. And if you focus on S&P 500 index funds, you'll get instant diversification in your portfolio without having to spin your wheels researching different companies.

If you're not familiar with the S&P 500, it's an index that consists of the 500 largest publicly traded companies. And it's generally considered a measure of how the stock market is performing on the whole.

You don't have to add S&P 500 index funds to your portfolio, as there are funds out there that track other market indexes. But if your goal is to diversify, it pays to focus on index funds that really do track the broad market.

Don't sweat your lack of funds

Not everyone has thousands of dollars to invest with on a regular basis. And the good news is that you don't need a ton of money to assemble a healthy investment mix. If you focus on fractional shares and broad market index funds, you'll put yourself in a solid position to grow your portfolio, all the while weathering whatever storms come your way.

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