If there was any Mount Rushmore investment advice, it would surely be there: “Make sure you are decentralized.” We don’t want our portfolio to depend on too few factors, so it’s important to diversify our company size, sectors, and geographic locations. Concentrated portfolios may have upsides, but the downsides are usually much worse (and more likely to happen over time).
Ideally, I would like to build a portfolio of 25 or more shares, but rather than focusing on individual companies, I invest in exchange-traded funds (ETFs) that allow me to invest in many companies at once. You don’t need many ETFs to get the job done.
If I were to start from scratch, I would invest $20,000 in these three ETFs.
When in doubt, look to the S&P 500 ETF
Very few stocks cover such a wide range S&P 500 ETFs. Tracking the top 500 publicly traded companies in the United States, the S&P 500 is the stock market’s most watched index, and its performance is often used interchangeably with the overall stock market performance.
Aside from the expense ratio, there are no visible differences between the S&P 500 ETFs. iShares Core S&P 500 ETF (IVV -0.21%)is low cost and includes companies from all 11 major sectors.
- Communication services (7.20%)
- Consumer Discretionary (9.66%)
- Consumer Discretionary (7.30%)
- Energy (5.26%)
- Finance (11.58%)
- Healthcare (15.80%)
- Industrial (8.70%)
- Information Technology (25.52%)
- Materials (2.77%)
- Real Estate (2.72%)
- Utilities (3.22%)
The S&P 500 only includes large-cap stocks, so it’s not 100% diversified, but it’s good for giving investors broad exposure to big companies in a single investment. It also helps that most industry leaders and blue chip stocks are included. Therefore, we base our portfolio on the iShares Core S&P 500 ETF and invest $13,000.
don’t miss the little ones
Because of their size, small-cap companies have more room to grow than large-cap companies, which often bodes well for investors. However, it is also their small size that makes them vulnerable to volatility and broader economic conditions. It’s a risk/reward trade-off.
Because of the risks, you don’t have to have all of your portfolio in small caps, but you should have some. I Vanguard Russell 2000 ETF (VTWO -0.26%) Reduce risk.
The Russell 2000 is considered the leading benchmark for small caps. It has similar status in terms of covering the small cap universe as the S&P 500 has for large caps.
With a low expense ratio of 0.10% ($1 for every $1,000 invested), the Vanguard Russell 2000 ETF contains 1,970 shares across all 11 major sectors. They probably won’t grow as fast as individual small-cap companies, but they also don’t take as much risk.
Invest $3,000 in the Vanguard Russell 2000 ETF.
leave room for foreign stocks
A truly balanced stock portfolio should include international companies. If you’re only investing in American businesses, you’re missing out on some great companies and investments.
International markets are divided into two categories: developed and emerging. Developed markets typically have developed economies, established industries, and high standards of living (e.g. US, UK, Japan, Australia). Emerging markets typically have less infrastructure, younger capital markets, and less stable economies (Mexico, Brazil, Russia, India, etc.). Like small caps, emerging market companies are riskier, but tend to rise as they grow with the market.
Researching individual companies can already be time consuming, but it is an extra layer when you need to take into account things like local economics and politics that make or break a company.Instead of going through it, I Vanguard Total International Equity ETF (VXUS -1.00%)includes over 7,900 companies in both developed and emerging markets.
With a 12-month dividend yield (average dividend yield over the last 12 months) of 3.11%, the Vanguard Total International Stock ETF offers higher dividend income than the iShares Core S&P 500 ETF (current yield of 1.69%) and Vanguard Russell 2000 ETF (yield 1.48%).
A good rule of thumb is to invest 20% of your stock portfolio in international stocks. Therefore, he invests $4,000 to round out the total investment of $20,000.