How to Build a Diversified Stock Portfolio
The stock market can be a good long-term investment, but only if you build a diversified portfolio of stocks. Putting all your money in one stock means putting all your eggs in one basket, and if that stock goes to zero you lose all your money. As an investor, you have a number of ways to build the diversified stock portfolio you need, even if the amount you have to invest is limited.
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Instructions
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Contact several large low-cost mutual fund companies. Vanguard, TIAA-CREF and Charles Schwab are three of the largest and best known mutual fund companies, but you can contact other firms as well. Ask for a prospectus for each firm's index funds. Index funds provide instant diversification, because they buy all of the stocks in a given index. In addition, index funds have performed better than the vast majority of managed funds over time. According to a study published in Money Magazine, most managed mutual funds fail to keep up with the performance of their underlying indexes.
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Read each prospectus carefully, especially the sections detailing the fees associated with owning the fund. An analysis of mutual fund costs posted on the Motley Fool website found index funds with expense ratios as low as 0.18 percent, so you can use that as your benchmark when evaluating costs. An expense ratio of 0.18 percent means you would pay just $18 per year per $10,000 of investments.
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Review the performance of each index fund. These funds should closely track the performance of the underlying index in both good and bad years. Be wary of funds whose performance is significantly worse than the index they track.
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Choose the index fund you wish to purchase, then complete the application and submit it to the mutual fund company. Include a check for your initial investment, and use the application form to set up an automatic monthly transfer from your bank account to the mutual fund if you wish. Putting the same amount of money into your diversified portfolio month after month is known as dollar cost averaging, and it can be a good way to build wealth over time.
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