Here’s How to Build a Diverse Portfolio With a Single Investment

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You don’t need to own dozens of individual stocks to diversify. Read on to learn more. 

You’ll often hear that diversification is important to any investment portfolio. Branching out nicely could set the stage for growing a lot of wealth over time. It could also help you minimize losses in the event of a stock market slump — something many long-term investors are more than familiar with.

Now you could diversify your portfolio by investing in dozens of stocks across a range of market sectors. But believe it or not, it’s actually possible to assemble a diversified portfolio with just one investment.

When you invest in the broad market

Some investors prefer to load their brokerage accounts with ETFs instead of individual stocks. When you buy shares of an ETF, what you’re doing is getting a collection of stocks with a single purchase.

Now there are different types of ETFs you can choose to put your money into. But if your goal is to diversify your portfolio, you may want to focus on S&P 500 ETFs.

The S&P 500 is a market index that consists of the 500 largest publicly traded companies. Often, the S&P 500 is used as a benchmark to determine how well or poorly the stock market is doing on a whole. So if you buy shares of an ETF that invests in that index, you’re branching out quite nicely.

Of course, you may be wondering how well your portfolio might fare financially if you load up on S&P 500 ETFs. To that end, you should know that over the past 50 years, the S&P 500 index has rewarded investors with an average annual 10% return before inflation.

This doesn’t mean that every year has been a stellar one for the S&P 500 over the past half-century. In fact, there were plenty of years when the index lost money, and plenty of it.

But all told, the S&P 500 has generated a 10% yearly return on average. So chances are, if you buy shares of an S&P 500 ETF and hold them for many years, you’ll get to enjoy a similar return in your portfolio.

To that end, let’s say you put $250 a month into an S&P 500 ETF over a 40-year time period. At an average annual 10% return, you’re looking at a portfolio worth over $1.3 million. Talk about a lot of money.

It’s okay to fall back on S&P 500 ETFs

If you put all of your money into an S&P 500 ETF, you’re not going to beat the broad market. To do that, you’ll need to invest in different companies individually and hope that their performance outpaces the stock market on a whole.

But if you’re happy with the idea of a 10% return on your money over time, then it pays to rely on S&P 500 ETFs to branch out in your portfolio. And that way, you won’t have to sink too much time into diversifying your holdings and worry that you’re choosing the wrong individual stocks along the way.

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