15 Ways to Build a More Diversified Portfolio

There are a variety of strategies that long-term investors can utilize to maximize their returns and generate consistent portfolio growth. And one important aspect of a successful long-term investing strategy is to employ a pattern of portfolio diversification.

An underdiversified portfolio can leave your assets particularly vulnerable in times of market volatility and downturn. Moreover, failing to properly diversify your assets -- such as by focusing your portfolio too heavily on a particular stock or stock sector -- can interfere with your ability to realize consistent long-term returns in a variety of market environments.

Today, we’re going to dive into 15 easy ways to build a more diversified portfolio that can help you generate more investing wins and optimize your portfolio’s performance over the long haul.

Let’s jump right in.

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The reality is that some sectors of the stock market are more vulnerable in periods of economic downturn than others. And the stock market is cyclical. If you pivot your portfolio too much toward just a single stock market sector, you could find yourself in an unnecessarily risky position should the market take a nosedive.

For example, in the aftermath of the stock market crash of March 2020, industries like healthcare, tech, and consumer staples fared remarkably well, while industries such as travel and energy struggled against pandemic headwinds. That’s not to say that you shouldn’t invest in stocks with industries that are more prone to volatility, but it’s wise to take a more guarded approach when you buy shares of companies operating in more turbulent sectors.

Generally speaking, filling your basket of stocks with companies from a wide range of sectors allows you to draw upon a variety of impetuses for long-term growth while priming your portfolio for greater resilience should a particular group of stocks experience a surge in volatility.

ALSO READ: How to Build an Investment Portfolio

Quality high-risk, high-reward stocks can help you build a market-beating portfolio, but they shouldn’t outweigh your collection of more stable investments that consistently deliver shareholder value and returns.

If you find you’re currently holding onto more high-volatility investments than you’re comfortable with, it might be time to consider rebalancing your basket of stocks to comply with your current aptitude for risk and longer-term objectives for your portfolio.

One of the most effective ways to diversify your portfolio is to structure it around a broad variety of assets. In addition to high-caliber value, growth, blue chip, and dividend stocks, other types of investments such as bonds, index funds, mutual funds, and real estate investment trusts (REITs) can play a valuable role in helping you generate and sustain long-term portfolio returns.

Your propensity for risk and even your personal investing objectives might change over time. While a long-term investing mindset is the most effective way to pursue maximum returns through the stock market, you may still need to tweak your portfolio on occasion.

This is perfectly normal. Don’t be afraid to check your investments now and then to ensure your current asset allocation still meets the overall vision you have for your portfolio.

ALSO READ: 3 Ways to Build a Portfolio You Won't Lose Sleep Over

There are several ways to achieve portfolio diversification, and the method you go with will depend greatly on your personal circumstances, investing goals, and level of risk tolerance.

For example, if you tend toward a more passive investing approach, investment funds can be a great way to go, as these instantly open your portfolio up to an extensive collection of assets (i.e., stocks), either in a specific sector or a range of sectors. On the other hand, active investors tend to dedicate much more time to thoroughly educating themselves about a select group of individual stocks that they then proceed to build a portfolio around.

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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!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Growth and value investing are two common strategies that long-term investors use to maximize portfolio returns, and both types of stocks can help you build a winning, diversified basket of investments.

Growth stocks are companies that consistently grow their earnings at an above-average pace relative to their competitors. While there are notable exceptions, growth stocks often trade at steep valuations.

On the other hand, value stocks are companies that, when viewed in the context of their financial performance and future growth prospects, are trading at a bargain.

Another way to diversify your portfolio is to invest in companies with a range of market capitalizations. Quality small-cap stocks with a solid long-term growth trajectory can add significant upside potential to your portfolio, while large-cap companies are often household names that can provide both consistent returns and balance to your overall holdings.

ALSO READ: 3 Compelling Small-Cap Stocks With Big-Cap Potential

Dividend stocks are an integral part of many well-diversified portfolios. Investors tend to love dividend-paying stocks for a variety of reasons. Not only can investing in these companies provide you with another source of income or cash, but you can use your dividends to grow your portfolio more quickly.

Another great thing about dividend stocks is that you can find them in just about any stock market sector, which means you can balance your portfolio with quality companies according to your preferred industry composition, all while generating some extra cash at the same time.

To build a diversified portfolio that stands the test of time, it’s important to invest not only in a wide variety of high-quality stocks but also in companies that you’re truly comfortable holding onto for a long, long time.

In short, you shouldn’t buy a stock unless you’re committed to keeping it in your portfolio for at least three to five years. And using this minimum holding period as a litmus test before you buy any stock can help ensure you avoid making rash investing decisions.

Both bull markets and bear markets present their own unique kinds of investing opportunities. Learning to recognize prime buying moments in the market can help you make effective investing choices to achieve a successful pattern of diversification. But it’s also important to check your emotions at the door before you click the buy button.

In times of high market volatility, it’s easy to let strong emotions like panic or even greed lead the way, whether you’re thinking about investing in new stocks or selling existing holdings. Giving way to either of these emotions can lead you to make problematic investing decisions, and you might end up introducing needless risk to your portfolio in the heat of the moment.

The market is cyclical, which means it will inevitably fluctuate throughout your investing journey. If you find yourself ready to make an investing decision but aren’t sure whether your emotions might be getting too much in the way, sleep on it and reconsider in the morning. And sometimes, when the market is particularly volatile, the best way to safeguard the stability of your portfolio is to do nothing and wait for things to correct.

5 Winning Stocks Under $49
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!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

The way in which you diversify your portfolio is a personal decision, and much of it boils down to your personal preference and tolerance for risk. Some investors tend to focus most or all of their portfolio on more conservative investments, while others like to mix things up with a smattering of high-risk stock plays.

Assessing and understanding your personal level of risk tolerance is essential to build a diversified portfolio that can propel you toward your particular long-term personal finance goals.

ALSO READ: 3 Great Stocks for Low-Risk Investors

No investment portfolio is perfect, and no investor is, either. Whether you’re new to the investing game or have decades of experience under your belt, mistakes can and do happen. But taking note of the most common pitfalls investors encounter can help you reduce the incidence of unwanted stumbles in your journey to build a high-performing, well-diversified investment portfolio.

As you intermittently evaluate and rebalance your holdings to ensure these represent your preferred level of risk, you might see where past mistakes have cost your portfolio optimal performance. Don’t dwell on missteps in your investing journey -- they happen to everyone. Instead, learn from them, adjust your strategy where needed, and keep investing.

The level of risk that you’re comfortable maintaining in your portfolio right now may look very different than your ideal level of risk exposure did five to 10 years ago, or will look like five to 10 years from now. This is one of the reasons why you may occasionally need to rebalance your portfolio.

And when you maintain an investing mindset that focuses on long-term rather than short-term portfolio goals, you can also better ensure that your investments are ready to weather any unexpected market changes and fluctuations.

One of the easiest ways to underdiversify your portfolio is to own too few stocks. While there’s no magic formula for how many stocks you should own to build a well-rounded portfolio, spreading your investments across a variety of asset classes and types is one of the most effective ways to achieve this goal and reduce excess portfolio exposure in times of market volatility.

Of the wide variety of investment funds that can help you to generate meaningful long-term portfolio growth, exchange-traded funds (ETFs) are by far one of the most popular. When you buy an ETF, you essentially buy the entire basket of stocks or bonds contained within that fund. Considering that some ETFs are composed of hundreds of companies, this makes it easy to diversify your portfolio at a far more rapid pace than if you were to individually invest in each of these stocks.

5 Winning Stocks Under $49
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!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Investor chatter about another market crash or a correction is rampant these days. The truth is, no one knows for sure what will happen next, but the signs that another downturn could be in the offing are certainly there. If you’re worried about your portfolio’s potential vulnerabilities should the market crash again, now is the time to assess your portfolio’s performance, its stock and sector makeup, and your comfort level with the risk factors your current investments pose.

If you’re thinking about buying new stocks right now, first ensure that you have savings to fall back on and are also in a financial position to invest. If so, there’s no question that now is an excellent time for investors to scoop up some premium stocks currently trading at bargain prices.

And if you’re looking to reduce existing volatility in your portfolio, focus on all-weather companies in stable industries that can help to safeguard your investments if the market does crash again in the near future.

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