If you really want to maximize your returns, diversify your stock portfolio by investing in indexes and individual stocks in the US and around the world.
To maximize my portfolio returns, I like diversify the stocks I hold beyond industries (technology, energy, retail, etc.). Holding individual stocks has benefits over investing in a mutual fund or index – and vice versa.
3 ways to diversify your stock portfolio
Invest in the indices
Each index has its own ETF (electronically traded fund). The S&P 500 has the SPY, the Nasdaq has the QQQ, the Russell 2K has the IWM, and the Dow Jones Industrials has the DIA. Just like buying a stake in a mutual fund, your investment is spread out over many, many companies, thus tamping down on risk.
But don’t just invest in one – invest in a few for extra diversification. The tech-heavy Nasdaq and the large caps in the S&P 500 might be going through a rough patch, while the small caps in the Russell 2K could be on fire.
(The SPX 500 has historically been a stellar performer. Some stock pickers – people who only invest in individual stocks – work hard to beat its returns every year. But this is an uphill battle. Far better to join the game than try to beat it.)
Hold stocks – but consider them an active investment
Obviously, an individual stock will have more volatility than an index composed of hundreds of names. When you hold them in your portfolio, consider yourself an active trader. Watch the chart carefully and be ready to sell when you earn the profit you have predetermined – or you could lose a lot of money quickly.
The benefit of holding an individual stock, of course, is that if it’s on a hot streak, your potential return is not being dragged down by the returns of other names in an index. In other words, you could hit a really big winner.
Diversify by geography
Why invest all your money in US-based companies when you can invest in Europe, Asia, Latin America, and Africa? There are strong companies posting excellent returns all around the world.
If you’ve never invested in an overseas company before, buy ETFs for emerging markets or for EAFE (Europe, Asia, Far East). Together with investments in, say, SPY and IWM, you will have a very well-diversified stock portfolio. An even bigger benefit? Your risk will be well-spread out.
This free guide will teach you how.
