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How to Know if You Are Diversified?

By Jason Moser - Mar 21, 2014 at 2:58PM

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How can investors know if they are truly diversified enough?

In this edition of The Motley Fool's "Ask a Fool" series, Motley Fool analysts Jason Moser and Brendan Mathews take a question from a reader who asks, "How can we truly know if we are diversified?"

Jason and Brendan both see diversity as a somewhat subjective measure as it depends on where the investor is in his or her investing life, along with the person's tolerance for risk. Investors who are trying to grow their wealth, for example, may want more exposure to stocks. One of the simplest vehicles for diversity in this case can be an index fund pegged to the S&P 500 which will give an investor outstanding diversity with low costs. Investors who are closer to retirement, though, are more focused on protecting their wealth; they will want to add more fixed-income investments into their portfolio to minimize risk while still aiming for a reasonable rate of return. Either way, diversity is in the eye of the beholder and will require some self-examination in any situation.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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