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It is totally possible to build a portfolio that grows but remains safe at the same time.
The key is to be aggressive in the right spots but conservative with everything else.
After reading this article you’ll have a solid understanding of how to diversify your stock portfolio and you’ll know what steps to take right away.
Why should you even learn how to diversify your portfolio?
Diversification is a common word among successful investors. Diversification is important when you want to protect your portfolio from potential risks.
Focus on one thing is great, but when you’re investing, you never want to keep all of your eggs in one basket.
STEP 1: Understand blue chip stocks
First, what the heck are blue chip stocks?
A blue chip stock is another way to describe a huge company with an excellent reputation. Think companies like Apple, Disney, Coca Cola, etc.
Blue chip stocks often have market caps over $150 billion and have a strong history of paying dividends. That being said, a start up company would not be considered a blue chip stock because it has no history of earnings.
It’s important to understand blue chip stocks when diversifying your portfolio because these companies are opportunities for secure investments.
What are some examples of blue chip stocks?
There are dozens of blue chip stocks out there. Some of which include:
Apple (AAPL)
Johnson and Johnson (JNJ)
Microosoft (MSFT)
Walt Disney (DIS)
Nike (NKE)
McDonald’s (MCD)
JPMorgan Chase (JPM)
Visa (V)
STEP 2: Understand growth stocks
What the heck are growth stocks?
A growth stock is a share of a company that is expected to grow at an above-average rate.
Growth stocks offer more rapid growth to your stock portfolio compared to blue chip stocks. But they also come with more volatility and risk. So, you can see why it is important to understand both so you can allocate your investments properly but we’ll go into further detail later.
What are some examples of growth stocks?
The list of growth stocks are more vast than blue chip stocks. In some cases, whats classified as a “growth stock” is debatable so you will have to do your own research on what companies you want to invest in for this portion of your portfolio. Some examples of growth stocks include the following:
Amazon (AMZN)
Facebook (FB)
Netflix (NFLX)
Tesla (TSLA)
STEP 3: Understand ETFs
What the heck are ETFs?
If you’ve been following us for awhile, you probably already know what an exchange traded fund (ETF) is. But for those who don’t know, an ETF is a basket of stocks collected in single shares that can be bought and sold on a stock exchange. In simpler terms, you can invest in one stock that acts like multiple stocks.
ETFs are great for both beginner and seasoned investors because they offer security and diversification.
What are some examples of ETFs stocks?
There plenty of different types of ETFs. You’ll find that many prioritize companies like technology, the environment, or even the top performing companies on the market. But overall, ETFs usually prioritize safety overall. Here are some popular ETFs designed for long term investing:
Vanguard S&P 500 ETF ( VOO)
SPDR S&P 500 ETF (SPY)
Invescco QQQ (QQQ)
iShares ESG Aware MSCI USA ETF (ESGU)
Vanguard Russell 2000 ETF (VTWO)
STEP 4: Diversify
Double down on safety
Now this is where we get down to the nitty gritty. There are three main categories you can focus on when building your portfolio. And they are:
Blue chip stocks
Growth stocks
ETFs
Hey, we just talked about those! That’s right. Now you have an understanding of the different types of investments you can prioritize for long term investing, and you’re ready to diversify your portfolio.
For long term investing, the best practice is to prioritize safety. That means the majority of your investments are going to be focused on ETFs and blue chip stocks. They won’t get you rich over night, but you’ll have a steady way to grow your money while you sleep. The average rate of return (ROI) for blue chip stocks is 10% per year. This may be slow, but it your investments will compound over time.
Allocate towards growth
Okay, so how much should you focus on growth?
A good rule of thumb is to allocate about 20% of your investments into growth stocks. No that doesn’t mean AMC or Pokemon cards.
Everyone wants their portfolio to grow at a rapid rate. But the reality is that rapid growth comes with risk. So, if you want to build a healthy portfolio that will take care of you in the long run, you won’t want to invest do aggressively into growth stocks.
Something to think about when diversifying your portfolio is to understand that slow growth will still compound over time. Volatile stocks won’t compound as effectively since they are unpredictable. But if a company returns 10% every year, then you can expect to double your money every 7 years or so.
To break things down you can allocate
20% on growth stocks
35% on ETFs
35% on blue chip stocks
10% cash
Diversifying your portfolio on your own
After reading this article, hopefully you have a better framework for how you want to diversify your portfolio.
If you’re looking to diversify your portfolio, your next step would be to research companies in each category we talked about today and put together a list of which ones are worth investing in. From there, you can diversify your portfolio to match your goals.
You can continue to educate yourself by reading the articles in our archive. And you can even join our membership! With our premium membership, we’ll teach you not only how to invest in great long-term stocks, but also sell covered calls and cash-secured puts, trade LEAPS options, and generate a couple hundred to a couple thousand dollars each month. You’ll have exclusive access to our community of wealth builders & all our content, which teaches you step-by-step on how to use these strategies. You’ll also be able to ask me & our team any questions you have & we can coach you each week!