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3 Tips for Building a Diversified Investment Portfolio
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3 Tips for Building a Diversified Investment Portfolio

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3 Tips for Building a Diversified Investment Portfolio

You'll often hear that a diversified investment portfolio is your ticket to long-term gains and minimized losses. But building a diverse portfolio could take a lot of legwork. If you attempt to assemble a portfolio of individual stocks, it will require a lot of research on your part. As such, it could pay to take the easier way out by diversifying via these methods instead.

1. Buy index funds

Index funds are passively managed funds whose goal is to match the performance of the indexes they're tied to. An S&P 500 index fund, for example, will aim to match the S&P 500's performance. The benefit of index funds is that they take a lot of guesswork out of investing, all the while offering instant diversification. With an S&P 500 index fund, for example, you're buying shares of a single fund that gives you exposure to 500 of the largest public U.S. companies.

Another great thing about index funds is that their fees -- known as expense ratios -- are very low. That's because with index funds, you're not paying for the expertise of a fund manager who's going to research and then hand-pick investments for you.

Image source: Getty Images.

2. Invest in actively managed mutual funds

Whereas index funds seek to track the performance of the indexes they're associated with, actively managed mutual funds have loftier goals -- to beat the market. And in exchange for all of that upside, coupled with the work of fund managers who sit there day in, day out analyzing investment choices, you'll pay heftier fees -- quite possibly up to 10 times as much as you'll pay for an index fund.

If your goal is to diversify your portfolio, actively managed mutual funds with a strong track record of success may be worth investing in. Just be aware that many actively managed funds miss their benchmarks consistently, and that index funds frequently outperform their actively managed counterparts.

3. Look to real estate

It's not just stocks that give you an opportunity to grow wealth. It also pays to look at real estate as a solid long-term investment. Now at this point you may be thinking "I'm not looking to flip a house or become a landlord." And that's OK. There's an easy way to invest in real estate without actually buying a piece of property yourself: REITs.

Short for real estate investment trusts, REITs let you invest in companies that own, operate, or finance income-producing real estate. For example, you might invest in a REIT that operates hotels, and then share in its revenue.

Just as you can buy individual shares of stock, so too can you buy REIT shares. And just like some stocks pay dividends, REITs pay dividends as well. All told, REITs are a great way to get into real estate without taking on the risk of buying properties and having to flip or maintain them yourself.

What's the best strategy for you?

While the choices above make diversification easy, you shouldn't shy away from owning individual stocks, too, and there's no single number you should aim for in that regard. Some investors do fine with a dozen or so stocks, while others hold 40 or more. The key is to research every investment you add to your personal mix, whether it's an individual stock, an index fund, an actively managed mutual fund, or a REIT. Doing your legwork will increase your chances of assembling a portfolio that works for you and ultimately helps you achieve your long-term goals.

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