As we have discussed many times in the past, one of the quickest, and easiest ways to diversify a portfolio is with exchange-traded funds. ETFs, as they are known, present an opportunity for even beginner investors to achieve wide diversification with limited capital and homework. Using just a handful of ETFs, you can easily build the perfect portfolio that will hold up through all kinds of markets.
ETFs come in many different flavors. For example, you could simply buy an ETF that is designed to track the performance of the Dow Jones. If you believe that the general trend of the Dow Jones will be higher over the long term, you could buy the SPDR Dow Jones Industrial Average ETF (DIA). The ETF should perform in-line with the overall Dow Jones, so you can instantly diversify your money over every stock in the index with one simple trade. This eliminates the need for large amounts of capital, greatly minimizes commissions and fees associated with buying a basket of different stocks, and removes the headaches associated with staying on top of so many different stocks.
Instead of buying an ETF that simply tracks one of the main indices, you could opt to buy an ETF that focuses simply on technology or housing stocks. They are available to track small or mid-cap sized companies. Simply put… if you can think of a particular sector of the market, chances are good that there is an ETF designed to track it.
Because of the diversity that ETFs provide, you can effectively run an entire portfolio by holding just a couple ETFs. The downside to this approach is that you will most likely never see sudden large moves to the upside. Being spread over such a large baskets of stocks would prevent your portfolio from seeing days of 10% to 15% moves like you can often times see with individual stocks. The other side of the coin is that you will never see these sorts of moves to the downside either. That is why advisors constantly tell their clients to diversify in order to prevent unnecessarily large losses.
Taking all of this into consideration, here are five ETFs that you can use to build the perfect long-term portfolio.