NerdWallet: Shares, Bonds, and Extra: An Introduction to Diversification for New Buyers

A majority of adults in the US (59%) are curious about alternative investments, according to a new NerdWallet poll. Alternative investments or "alts" are almost all assets that are not stocks, bonds or cash, such as real estate, cryptocurrencies or commodities like gold or oil. Most popular reason Americans cite for their ancient interest? Diversification.

More than 2 in 5 Americans who are interested in alternative investments in the future (44%) say they want to diversify the nature of their investments, while a quarter (25%) say the stock market is too volatile. In truth, history shows that despite periods of volatility, the stock market tends to rise over time. Depending on your interests, your risk tolerance and the time you need to invest in investments, there are many ways to diversify your portfolio – from purely within the exchange to a mix of assets containing alts.

Should I invest at all now?

According to the survey, about a third of Americans (33%) don't think now is a good time to start investing in the stock market. While investing is a great strategy for building wealth over the long term, it is best to ensure that immediate needs are met first, especially during financially precarious times.

Start by assessing your financial stability. Ideally, you want a steady job that allows you to pay for the basics, no high-yield debt and an emergency fund. A rule of thumb for such a fund is to budget for three to six months of spending, but even $ 1,000 can help you weather some unexpected financial impacts. And if you have a retirement plan like a 401 (k) at work and your employer offers matching dollars, you're contributing at least enough to earn the full match, because that's free money.

Observe: What if I keep my money in a savings account instead of investing it?

Once that foundation is in place, a broader investment is a good next step in securing your financial future. And diversification is key.

Why is diversification important?

The saying "don't put all your eggs in one basket" undoubtedly applies to investing: don't put all your money in one stock. Because if that storage tank, it could jeopardize your future goals.

Instead, diversifying your investments across a range of assets can reduce the chance that a poor performer will significantly affect your progress. It might sound daunting, but you don't have to be a seasoned stock picker to diversify your portfolio.

Diversification of your investment portfolio in 3 steps

Choose funds with many different stocks

Index funds are a simple and inexpensive way of diversifying within the stock market. An index fund is a type of mutual fund whose holdings match or replicate a market index. For example, a fund that replicates the S&P 500
The company, which includes 500 of the largest companies in the United States, could buy stocks from any company in the index. An investor then buys into the fund, the value of which reflects the gains and losses of the entire index it tracks and which costs far less than if you tried to buy 500 individual stocks.

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When choosing an index fund, look for the cost – mostly the expense ratio, essentially an annual fee expressed as a percentage of your investment – and the minimum amount required. If you don't have the time or desire to delve into certain index funds, a robo-advisor can also be a good choice. Robo-advisors use computer algorithms to manage investment portfolios and choose investments for you that take into account your goals, your schedule and your risk tolerance. They charge their own management fees but are cheaper than hiring a human investment advisor.

Consider adding bonds

For some, an all-stock portfolio, even if diversified with index funds, may be too risky to be comfortable with. Enter bonds that can further diversify your portfolio.

Bonds are fixed income securities that promise regular interest payments over time. As you near retirement and need the money you've saved, you can allocate more money to bonds to protect your portfolio from market fluctuations. A rule of thumb is that the percentage of the stocks you hold is 100 minus your age and the rest goes to bonds. When you are 25, you invest 75% in stocks and 25% in bonds.

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But every situation is different, and you should consider your goals and your risk tolerance when deciding how to invest. Again, a robo-advisor can do this for you if you choose to go this route.

Keep alts as a small part of your portfolio

Adding alternative investments to your portfolio can diversify it too, but be aware of the disadvantages of investing heavily in them. Alternative investments can produce higher returns than the stock market, but they can also come with higher fees, less liquidity, and higher overall risk. Many financial advisors say to limit these investments to less than 10% of your portfolio.

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