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Posted by Carley Stein (MONEY FORUMS: 6, Answers: 2)
Asked on November 15, 2015 9:54 pm
This is a great question. When investing professionals talk about diversification they aren't only talking about owning different stocks, but also different types of assets.
If you only have a say $1000, I would put it all in a low cost index fund or ETF, and then work on saving more. You could also consider a retirement date fund if you are specifically saving for retirement.
Like Beth mentioned, index funds give you unparalleled diversity at a limited cost (for less than $1000 you could own the equivalent several thousand unique stocks)
If you've got more than $1000 it's time to start thinking about asset allocation. Asset allocation is what will lead you to have a truly diverse portfolio (one that leads to greater risk adjusted returns).
Some standard asset allocation is 40% of your money in a bond fund and 42% of your money in a domestic stock fund (like those named above), and 18% of your money in an international fund, but you would do well to find an online calculator that would help you out.
Keep things simple by looking for index funds with low expense ratios (less than .5%), low on no trading commissions, and keep your savings rate up.
Carley, you should choose a mutual fund rather than trying to purchase individual shares in multiple stocks to achieve a diversified portfolio on a budget. You can start with a market-based index fund, which has the lowest management fees and the lowest capital gains tax liability.