3 ways to diversify your portfolio

Many investors run the risk of an overly concentrated portfolio. Here’s how to avoid that common mistake.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When building a portfolio, investors employ differing approaches to picking stocks. One might prefer growth stocks, another may pursue value stocks. But no matter what style of investor you are, understanding risk and building a portfolio that accounts for risk and reward is very important.

Charlie Munger, business partner of Warren Buffett, is fond of a saying by author Mark Twain: “Put all your eggs in one basket and watch that basket.” While I’m not one to argue with Munger, his advice does have a number of caveats, particularly for investors just starting out. The major problem with Munger’s advice is that it assumes the investor won’t make any mistakes. While Munger and Buffett rarely do make investment mistakes, for most investors mistakes are a regular occurrence.

One way investors can reduce their portfolio risk but not necessarily reduce their potential returns is by allocating a portion of their portfolio to investing in Listed Investment Companies (LICs).

Argo Investments (ASX: ARG) is one of the oldest and largest LICs on the Australian Stock Exchange and has over $4 billion in assets. Argo has a superb track record and significant holding in many blue chip companies, which offers shareholders an immediate exposure to a diversified portfolio of some of Australia’s largest and most established firms.

WAM Capital (ASX: WAM) is an investment portfolio skewed toward medium and small companies. Since inception in 1999 the portfolio’s returns before fees and taxes have been exceptional. For investors looking to learn more about the evolution of LICs, Chris Stott, the Chief Investment Officer at WAM, recently penned an article that provides a thorough background regarding LICs that you can read about here.

LICs don’t only offer exposure to Australian shares either, which means they can also be used to introduce international diversity to a portfolio. A number of LICs focus on international shares, including Platinum Capital (ASX: PMC), which is managed by the highly respected international fund manager Platinum Asset Management (ASX: PTM). Platinum Capital offers shareholders a diversified portfolio of global shares that currently includes holdings in software giants Microsoft and Google.

Foolish takeaway

Particularly for investors making their first foray in to the stock market, using a Listed Investment Company as a starting point for your portfolio can be a wise move. Not only does a LIC give you immediate diversification, but many LICs pay handsome dividends too. As an investor’s skill and confidence grows, he or she may then look to add some carefully selected individual stock ideas to the portfolio.

Looking to add some selective ideas to your portfolio? Interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »