I've extolled the Foolish virtues of diversification in previous commentaries, but on the off chance that maybe, just maybe, you haven't perused those yet, here's the short-form scoop: If you want a portfolio that helps you build wealth and get a good night's sleep, don't stuff all of your hard-earned investment moola into racy small-cap stocks or equities plucked from emerging markets. By the same token, a portfolio comprising nothing but buttoned-down blue chips isn't likely the way to go either.
Instead, the smart way to proceed is to build a portfolio that provides meaningful exposure to the market's various asset classes -- and to make investment decisions based on your investing timeline and tolerance for risk.
It's Stratego!
For all too many of us, strategy is one topic that's frequently left out of the diversification conversation. That's a crucial mistake. In addition to spreading your portfolio across the market's cap ranges and styles -- i.e., where an investment falls on the growth/value spectrum -- it's imperative to take strategy into consideration. And that's particularly true, I'd argue, when it comes to the investment vehicle of choice of more than 90 million of us: mutual funds.
An example: Vanguard 500 Index (VFINX) and Neuberger Berman Socially Responsive (NBSRX) are two funds that fall into Morningstar's "large-blend" category. Would owning both therefore be redundant? Not at all -- precisely because the funds' strategies are so very different.
500 Index is an S&P tracker with hundreds of names, and its portfolio is dominated by tried-and-true blue chips like General Electric (NYSE:GE), ExxonMobil (NYSE:XOM), Citigroup (NYSE:C), and Johnson & Johnson (NYSE:JNJ) -- a group of stocks, by the way, with current price-to-earnings (P/E) multiples that all clock in below their respective industry averages.
Meanwhile, the Neuberger Berman fund is a socially screened offering with fewer than 40 companies in its portfolio, including such international concerns as Vodafone (NYSE:VOD), Canadian National Railway (NYSE:CNI), and Toyota (NYSE:TM). Given the vast strategic differences between the two funds, I'd argue that holding both (as pieces of your overall large-cap allocation) could add an important layer of strategic diversification to your portfolio, a dimension that can help insulate you from the market's inevitable ups and downs.
The Foolish bottom line
If you're interested in taking a look at the way strategic diversification can help you stave off stomach-churning performance gyrations and beat the market, I encourage to you take a look at Motley Fool Champion Funds, the Fool newsletter service designed to help you find the right funds for your investing profile. A 30-day guest past is available for free, and with it, you'll receive access to our complete recommendations list, back issues, and model portfolios.
Our world-class discussion boards come gratis as well, a forum for vetting your asset-allocation game plan with a community of razor-sharp fund geeks. Just click here to get started.
Shannon Zimmerman, lead analyst for Motley Fool Champion Funds, doesn't hold a financial position in any of the companies listed. Neuberger Berman Socially Responsive is a Champion Funds pick, and Vodafone is a Motley Fool Inside Value pick. The Fool is investors writing for investors, and you can read all about our disclosure policy by clicking right here.
