Three tips for building a diversified portfolio
Building a diversified portfolio can seem daunting, given the many investment options. Here are three tips to make it easy for beginners to diversify.
1. Buy at least 50 stocks across various industries (or buy an index fund)
One way to build a diversified portfolio is by investing in several stocks. A good rule of thumb is to own at least 50 different companies.
However, it's important that they also be from a variety of industries. Although it might be tempting to purchase shares of a dozen well-known tech giants and call it a day, that's not proper diversification. If tech spending takes a hit due to an economic slowdown or new government regulations, all those tech stocks could decline in unison. Investors should ensure they spread their investment dollars across several industries.
A quicker way to diversify for those who don't have time to research stocks is to buy an index fund. For example, an S&P 500 index fund will aim to match the S&P 500's performance. The benefit of index funds is that they remove much of the guesswork from investing while offering instant diversification. For example, with an S&P 500 index fund, you're buying shares of a single fund that gives you exposure to 500 of the largest public U.S. companies.
Another great thing about index funds is that their fees -- known as expense ratios -- are very low. That's because, with the best index funds, you're not paying for the expertise of a fund manager who's going to research and hand-pick investments for you.
