Find out how investing in Exchange Traded Funds (ETFs) or Mutual Funds builds more diversification into a portfolio than buying individual stocks.
The Benefit of Diversification
People love investing in individual stocks. I know, I’ve done it. There is a thrill of doing research, identifying trends, and placing a bet. It is a high, much like placing a bet in Vegas.
However, over the last two decades I have determined that there is no place for individual stocks in my portfolio. If I want to gamble, I will go to Vegas.
When it comes to investing, I want a strategy. I want to profit from all market outcomes. And, that means I need diversification in my portfolio. I need lots of different kinds of eggs in my basket.
Diversification, in its simplest form, comes from having lots of variety in your investments. The benefit of diversification is that you will always have parts of your portfolio that are doing better than other parts. This allows you to rebalance, which is a way of automatically buying low and selling high.
So, how can you build diversification into a portfolio without buying a bunch of individual stocks?
How much diversification do you get if you buy Exchange Traded Funds (ETFs) or Mutual Funds?
Stock ETFs and Mutual Funds
I use FidelityGo RoboAdvisor for my investing. It automatically uses my money to buy four stock ETFs and two bond ETFs. Then, whenever the growth is uneven and my portfolio gets out of balance, FidelityGo automatically rebalances. It is awesome. You can read my first review or FidelityGo here, and my second review during the COVID-19 pandemic fluctuations here.
Here are the four stock ETFs I own, and how much diversification they offer.
The largest stock holding in all of the FidelityGo portfolios is the S&P 500. No surprise, there are 500 companies represented in this fund. They are the 500 biggest and most successful companies in the US. You have likely heard of them all.
This fund includes companies like Microsoft, Apple, Amazon, Facebook, Google, Johnson & Johnson, Berkshire Hathaway, Visa, Proctor & Gamble, Costco, and many more.
As Warren Buffett says: investing in the S&P 500 is a bet on America.
Mid Cap Stock
There are about 800 stocks in the FidelityGo Mid Cap Stock ETF. These are also large US companies. But, they are just short of qualifying for the S&P 500.
This fund includes companies like Lululemon, Spotify, O’Reilly Auto Parts, DocuSign, Chipotle, and others.
Small Cap Stock
There are about 2,000 stocks in the FidelityGo Small Cap Stock ETF. There is no overlap between the Mid Cap Stock ETF and this fund.
This fund likely includes quite a few companies you have never heard of, but some that you have. For example, Churchill Downs, BJs Wholesale, Deckers (who make UGGS and Teva footwear), Novavax (currently working on a COVID-19 vaccine), and many more.
There are about 2,400 stocks in the FidelityGo International ETF. And, just like the others, there is no overlap with the other FidelityGo ETFs.
This fund includes more companies you have heard of, like Alibaba, Nestle, Samsung, SAP, Astrazeneca, and many more.
As a whole, FidelityGo portfolios include about 5,700 individual stocks. These stocks are across all industries and sectors. They span the entire globe.
You get to be an owner of them all. And, that means that you get a share of their profits every single month in the form of Dividends.
But wait, there’s more!
No portfolio is complete without some bond holdings. Bonds are generally less volatile than stocks. And, they often trend in the opposite direction as stock. This allows you to have parts of your portfolio that are performing well in all market conditions.
All FidelityGo portfolios include two Bond ETFs.
The first is a US Bond Index, which basically represents the whole US Bond Market. It has about 350 borrowers including the Federal Government, Fannie & Freddie (mortgages), Ginnie Mae (student loans), credit cards, and auto loans.
The second is a more conservative Income Bond Fund. It has about 100 borrowers, primarily the private sector, including big banks like Morgan Stanley.
So, as an investor in FidelityGo you are a lender to about 450 different organizations. They have all borrowed money from you and promised to pay it back with interest.
I personally invest with FidelityGo, and I like it. This may seem like an endorsement of FidelityGo, but it is not.
Instead, it is an endorsement of diversification.
I don’t care if you use FidelityGo or something else. The point is that you don’t have to buy individual stocks. In fact, buying individual stocks is inefficient.
By picking just one RoboAdvisor, I am a part-owner of about 5,700 of the world’s largest and most successful companies and I get a share of their profits. Plus, I lend money to about 450 different organizations in exchange for interest.
Researching and buying that many different holdings would take years to execute. Plus, managing those holdings would take more hours than there are in a day. No thanks!
Investing is not gambling. Investing is getting paid for having money.
I get paid a percent of the profit of the top 5,700 companies on the planet. And, I get paid interest by the US Government and a couple-hundred additional US Companies.
That sounds a whole lot more profitable than a trip to Vegas!
I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.