3 Tips for a Diversified Portfolio

A look at how to build a diversified portfolio.

By Matthew DiLallo – Updated Dec 4, 2025 at 9:59 PM EST

Key Points

Invest in at least 25 stocks from various industries or an index fund for quick diversification.
Include fixed-income assets like bonds to lower volatility and reduce risk in your portfolio.
Add real estate through REITs to potentially increase returns and further reduce portfolio volatility.
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Most people have heard the old saying, "Don't put all your eggs in one basket." The logic: If a farmer were to stumble while bringing the basket of eggs back from the henhouse, they could end up with a messy situation. Those words of wisdom go well beyond farming; they also perfectly encapsulate the idea of not risking all your money on a single investment.

One way investors can reduce their risk of a cracked nest egg is by diversifying their portfolio. Here's a look at what that means, as well as three tips to help you quickly diversify your investments.

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A hypothetical example of a diversified portfolio that invests in a variety of industries, countries and market caps. — Image source: The Motley Fool.

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Stock

A stock represents an ownership interest in a business. When a business wants to raise money, its board of directors determines the number of shares to issue.

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2. Put a portion of your portfolio into fixed income

Another important step in diversifying a portfolio is to invest some capital in fixed-income assets like bonds. While this will reduce a portfolio's overall returns, it will also lessen the overall risk profile and volatility. Here's a look at some historical risk-return data on a variety of portfolio allocation models:

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Data source: Vanguard. Return data from 1926 to 2021.
Portfolio Mix	Average Annual Return	Best Year	Worst Year	Years with a Loss
100% bonds	6.3%	45.5%	(8.1%)	20 out of 96
80% bonds and 20% stocks	7.5%	40.7%	(10.1%)	16 out of 96
40% bonds and 60% stocks	9.9%	36.7%	(26.6%)	22 out of 96
20% bonds and 80% stocks	11.1%	45.4%	(34.9%)	24 out of 96
100% stocks	12.3%	54.2%	(43.1%)	25 out of 96

Although adding some bonds reduces a portfolio's average annual rate of return, it also tends to mute the loss in the worst year and cut down on the number of years with a loss.

While picking bonds can be even more daunting than selecting stocks, there are easy ways to get some fixed-income exposure. One of them is to buy a bond-focused exchange-traded fund (ETF).

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3. Consider investing a portion in real estate

Investors who want to take their portfolio diversification to another level should consider adding real estate to the mix. Real estate has historically increased a portfolio's total return while reducing its overall volatility.

An easy way to do this is by investing in real estate investment trusts (REITs), which own income-producing commercial real estate. The sector has an excellent track record. In the 25-year period ending in 2021, REITs, as measured by the FTSE Nareit All Equity REIT Index, generated an average annual total return of 11.5%.

Several studies have found that an optimal portfolio will include a 5% to 15% allocation to REITs. For example, a portfolio with 55% stocks, 35% bonds, and 10% REITs has historically outperformed a 60% stock/40% bond portfolio with only slightly more volatility while matching the returns of an 80% stock/20% bond portfolio with less volatility.

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Related investing topics

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Interest compounds when interest payments also earn interest. Learn how to get compounding interest working for your portfolio.

How to Invest in ETFs for Beginners

Exchange-traded funds let an investor buy many stocks and bonds at once in a single transaction.

How to Research Stocks

Good research can help investors find the best companies to invest in.

Investing in Diversified REITs

When it comes to REITs, don't put all your eggs in one property -- diversify!

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About the Author

Matt DiLallo has been a contributing Motley Fool stock market analyst specializing in covering dividend-paying companies, particularly in the energy and REIT sectors, since 2012. He also covers pre-IPO companies, ETFs, and other investing topics. He holds an MBA from Liberty University.

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