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15 Investments for Investors Looking to Diversify Their Portfolio

By Selena Maranjian - Feb 22, 2022 at 7:00AM
Person writing the word Diversification on a notepad in black marker.

15 Investments for Investors Looking to Diversify Their Portfolio

Diversification is good

"The only time you're really diversified is when you have assets you don't want to own." -- attributed to Peter Bernstein

If we didn't diversify our portfolios, they may feature only one kind of investment -- our favorite kind. That's risky, because not all kinds of investments pan out over all periods. For best results, it's smart to spread your dollars across at least a handful of different kinds of investments. Here's a look at 15 kinds of investments to consider. You needn't park money in each of them -- just see which ones make sense for you.

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Hand of a person in a suit is pointing to the word Indexing.

1. Index funds

Let's start with the easiest -- and arguably the best -- way to diversify your portfolio: via one or more low-cost index funds. An index fund is a mutual fund that simply holds the same assets as those in a particular index, in order to reap roughly the same returns (less fees). So an S&P 500 index fund will track the S&P 500's results -- and many other index funds will track other indexes. Index funds exist for different sectors of the market, and for assets such as bonds, too. Park your dollars in a broad-market index fund, and you'll instantly be invested in a wide range of companies.

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A smiling person holding a wad of cash.

2. Dividend-paying stocks

If you're willing to take some time to learn more about investing in stocks, in order to select some for your portfolio, consider carefully chosen dividend-paying stocks. Dividend stocks are terrific, not only for retirees and near retirees looking for dependable income but also for investors of any age. After all, that dividend income can be used to buy more shares of stock, which can help your portfolio grow faster.

ALSO READ: How to Invest in Dividend Stocks: A Guide to Dividend Investing

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A happy person riding a scooter.

3. Growth stocks

Growth stocks are also well worth considering for your portfolio. They're stocks of companies that are increasing their revenue and earnings at a faster-than-average clip. Growth stocks have a lot of potential and may deliver explosive returns, but they can also be overvalued -- and many don't end up performing as you might have hoped they would. For best results, learn more about investing first -- and more about businesses in general, too. Our investing philosophy at The Motley Fool may help you do well with growth stocks: It recommends buying at least 25 stocks, planning to hold them for at least five years. That can boost your odds of ending up with some big winners in your portfolio, because you'll be giving the companies time to perform and grow.

ALSO READ: Growth Investing: A Step-by-Step Guide for Getting Started

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A scale measuring price versus value.

4. Value stocks

At the other end of the spectrum from growth stock investing is value investing, the strategy employed with considerable success by investors such as Warren Buffett. Value investors aim to buy stocks at a discount, thereby securing a margin of error. Don't assume that value stocks will be slow growers -- because a growth stock may fall to an undervalued level and be both a growth and value proposition at the same time.

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A pen and memo book lying next to blocks that spell out real estate.

5. REITs

Another solid way to diversify a portfolio is with REITs -- real estate investment trusts. They allow you to invest in and profit from real estate without having to sink hefty sums into real estate properties that can be costly to maintain and a bother to sell. REITs are companies that own and lease out real estate -- and in which we investors can invest easily, and with small or large sums. They're required to pay out at least 90% of their income in dividend form in exchange for tax breaks. Many REITs specialize in a certain kind of property, such as apartments, medical facilities, office buildings, storage buildings, retail centers, data centers, and so on, while others have a more mixed portfolio.

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ETF written on a chalkboard in a shopping basket.

6. ETFs

Consider exchange-traded funds (ETFs), too. They're technically funds, but they trade like stocks, on exchanges. As funds, each share will distribute your money across multiple assets -- perhaps hundreds or thousands of stocks -- offering easy diversification. Many ETFs are index funds, with very low expense ratios (annual fees).

ALSO READ: How to Invest in ETFs

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Small Cap written on sticky note among pages containing colorful bar graphs.

7. Small-cap stocks

You can diversify a portfolio in many ways, and one of them is by company size -- making sure to not be too heavily weighted in large companies or small companies, for example. Many investors like to pepper their portfolios with small-cap stocks (those with market values between about $300 million and $2 billion) because those are the ones with the most room to grow. They can be a bit more risky, though, as some of them are not yet profitable, perhaps because they're plowing every available dollar into furthering their growth.

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Four piggy banks in ascending order by size.

8. Mid-cap stocks

It's easy to focus on large- and/or small-cap stocks, while paying little attention to mid-cap ones. That's a shame, because mid-cap stocks (with market values between about $2 billion and $10 billion) offer the best of both worlds. Like small caps, they're still relatively small and have a lot of possible growth ahead, but like large caps, they're more established than small companies and are often profitable, too.

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A crossroads sign with the words Think Bigger.

9. Large-cap stocks

Large-cap stocks, with market values between about $10 billion and $200 billion, can be great ballast for a portfolio, tied to solid, established (and often very familiar) companies. Large-cap stocks can be slower growers, as it can be hard for a company such as, say, Coca-Cola to sell many more beverages from year to year as it's already in just about every country and has fairly saturated many markets. Still, many huge companies can grow at rapid rates -- think, for example, of Apple, Microsoft, and Alphabet.

ALSO READ: Investing in Large-Cap Stocks

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World map made up of different currencies.

10. International stocks

You can diversify your portfolio by aiming to hold stock in companies based not only in the U.S. but around the world. You can do this by choosing some foreign companies on your own, or you might opt for an index fund or two that looks beyond the U.S. borders. Two good options are the Vanguard Total World Stock Market ETF (NYSEMKT: VT) and the Vanguard FTSE All-World ex-US ETF (NYSEMKT: VEU), which respectively will invest your dollars across the total world stock market (including U.S. stocks) and the total world stock market excluding U.S. stocks.

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A gold coin with the Bitcoin symbol.

11. Cryptocurrencies

Cryptocurrencies are increasingly popular and widely held these days, but don't jump into them until you feel confident you know what you're doing and that you understand cryptocurrencies well, too. Understand that the crypto world is complex and risky -- in part because cryptocurrencies can be hacked. There are also lots of different cryptocurrencies, of varying quality, and it can be hard to determine which are the ones to consider.

ALSO READ: Is Cryptocurrency a Good Investment?

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Colorful variety of government bonds.

12. Bonds

Bonds can be another good way to diversify your portfolio, as they're a completely different kind of asset than stocks. Bonds are essentially loans you make to government entities or companies, in exchange for which you receive interest payments. You can buy individual bonds like you can invest in individual stocks, but many people find it easier to invest in bond-focused mutual funds -- including bond index funds.

ALSO READ: How to Invest in Bonds

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Person looking out to water and smiling.

13. Short-term investments

Most portfolios could use some short-term investments, because not every dollar in the portfolio is destined to remain in it for many years. You may, for example, be saving up to make a down payment on a home in a few years -- and ideally, you should only invest in stocks with money you won't need for at least five (if not more) years, because the stock market can be volatile and is unpredictable. So for short-term dollars, consider certificates of deposit (CDs), money market accounts, short-term bonds, and even savings accounts. Interest rates have been very low for many years now, but it looks like they'll be heading up soon.

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A burlap sack full of cash.

14. Cash

You might also want to accumulate some cash in your portfolio -- in anticipation of inevitable stock market crashes and corrections. They tend to happen at least every few years, and when they do, they can present compelling bargain prices for stocks you'd love to own. That said, don't overdo it, as having a lot of cash on hand means you may miss out on some great stock growth. Also, cash stakes can lose value due to inflation, which has been trending up lately.

ALSO READ: What Does "Cash Is King" Mean?

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Person reading document and smiling at camera.

15. Invest in yourself

Finally, consider investing in yourself. After all, you are kind of a value-generating asset, via your job(s) and your investments. Take some time to learn more about investing -- and perhaps great investors and great businesses, too. Think about how you might move ahead in your career -- perhaps by earning additional degrees or certifications. Invest in your health and your relationships, too -- by exercising, eating a nutritious diet, and spending time with your family and friends.

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Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

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An adult and child are each balancing on one leg on a yoga mat.

Balance is important

Just as it's important to have a work-life balance, it's good to have some balance in your portfolio, too. You don't want to be overloaded with, say, biotechnology stocks or bonds, while not having certain other key asset classes in your portfolio. You don't have to include every kind of asset mentioned in this slideshow, but do aim to spread your money across multiple kinds of assets.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Selena Maranjian owns Alphabet (A shares), Alphabet (C shares), Apple, and Microsoft. The Motley Fool owns and recommends Alphabet (A shares), Apple, and Microsoft. The Motley Fool recommends Alphabet (C shares) and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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