Depending on which money manager you talk to, it takes from 20 to 30 stocks to create a portfolio that's truly diversified. But if you hold that many stocks, you should be keeping tabs on each and every one by following earnings and revenue reports as well as news that could send investors scurrying for the exits.
That's why most beginning investors are better off investing in mutual funds and leaving stock picking to the pros. Fund managers make it their full-time job to track stocks and build in diversification—spreading the risk so all the holdings don't go up and down at the same time. But just because you own a few funds doesn't mean you're automatically diversified.
Mix it up with style
To understand diversification, you need to know that funds have a specific focus, what's referred to as investing "style"—large-company growth, for instance, or small-company value. Style is a loose description of what types of companies the fund manager looks for. Large-cap growth funds should own stocks of big companies that have the potential to grow year after year. Small-cap value funds, on the other hand, look for small companies that are selling for less than what market analysts think they're worth.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The best way to get a diversified portfolio is to make sure you have your hand in a little bit of each style. Consider owning at least five funds, each representing the major styles: large-cap growth, large-cap value, small-cap growth, small-cap value—plus an international fund. Investors nearing retirement or who expect to need income might want to add a balanced fund, which has more income-producing securities.
Fund styles fall in and out of favor almost as abruptly as women's fashion, especially when the markets are in transition and you don't know which way they're going to go. If you diversify, you can benefit no matter which direction the market is going without playing the losing game of trying to time the market. In a volatile market, for example, which style is in vogue is likely to shift without warning.
Avoid overkill
Fund managers like to emulate the investing strategies of successful peers, so it's easy to unwittingly own too much of a sector or stock even though you've invested in more than one fund. The easiest way to avoid overlap is to pick funds that stay true to their style. Kiplinger lists each fund's style in our Fund Finder. Another quick way to gauge fund style is to log on to Morningstar.com (opens in new tab) and type in the fund symbol, then scroll down to the style box. If you typed in JANSX (opens in new tab), the symbol for Janus Fund, for example, you'd see that it invests in large companies with growth potential and has most all of its assets in stocks.
-
-
Time to Consider Foreign Bonds
In 2023, foreign bonds deserve a place on the fringes of a total-return-oriented fixed-income portfolio.
-
How to Get Your Long-Term Care Planning on the Right Track
Many of us are not as prepared as we should be, but it’s not too late. Taking these steps today can get you started on planning for your long-term care.
-
Kiplinger's Retail Outlook: Consumers Are Still Resilient
Economic Forecasts Kiplinger's Retail Outlook: Sales this year are likely to be mostly stable, even as the economy slows.
-
Kiplinger Energy Outlook: Cheaper Prices at the Pump on the Way
Economic Forecasts Kiplinger Energy Outlook: Cheaper prices at the pump are on the way. Turmoil in the financial markets is hitting oil prices, which means cheaper fill-ups.
-
Kiplinger’s Interest Rates Outlook: Rates Likely to Rise Again After Banking Crisis is Over
Economic Forecasts Kiplinger’s Interest Rates Outlook: Rates Likely to Rise Again After Banking Crisis is Over
-
Kiplinger's GDP Outlook: The Economy is Slowing, But Not Quickly
Economic Forecasts The economy is slowing, but not quickly. There may be a recession in the second half of 2023, but it could be delayed.
-
How to Choose a Mutual Fund
mutual funds Investors wanting to build a portfolio will have no shortage of mutual funds at their disposal. And that's one of the biggest problems in choosing just one or two.
-
7 Common Investing Myths, Debunked
investing The "conventional wisdom" is sometimes anything but. Financial experts dissect seven frequently touted lines of bad advice.
-
37 Ways to Earn Up to 9% Yields on Your Money
Becoming an Investor Our field guide to income investments of varying dividend yields and interest rates identifies opportunities ranging from ordinary to downright exotic.
-
PODCAST: Decoding ESG Investing with Ellen Kennedy
Becoming an Investor Environmental, social and governance investing is simpler than it sounds, and has a profitable track record to boot.
