If you’re in your 20s, 30s, or 40s and your goal is to leave your investment portfolio untapped until retirement age, then you really should have the bulk of your assets in stocks. If you spread your assets evenly between stocks and bonds, your portfolio could generate more of an average annual return of 5%. In our example, that would leave you with around $479,000 – still plenty of money, but clearly nowhere near the million dollars you might be aiming for.
The 8% return we were counting on earlier is by no means guaranteed. But if you want to increase your chances of earning strong returns in your portfolio, you’ll need to diversify.
If you stock up on stocks from just one market segment, you risk incurring significant losses if that specific segment crashes. Instead, spread your money around you. Buy tech stocks, but also healthcare stocks, energy stocks, banking stocks, and auto stocks.
If the thought of choosing different stocks seems overwhelming, there is another option you can consider: broad-market ETFs. ETFs let you own a whole bunch of stocks with a single investment. And if you get heavy on the S&P 500 ETFs in particular, you will effectively own 500 different companies – without having to acquire them individually.