Why diversification is important and how to diversify your portfolio with ASX shares

While it is tempting to fill a portfolio with tech shares like Afterpay Ltd (ASX:APT) and Xero Limited (ASX:XRO), it might not be wise to do so…

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While it might be tempting to load up a portfolio full of the hottest stocks like Afterpay Ltd (ASX: APT) and Xero Limited (ASX: XRO), having too much exposure to one particular sector can be a bad thing for a portfolio.

You only need to look at the travel sector to see this. Through no fault of their own, the shares of Flight Centre Travel Group Ltd (ASX: FLT) and Webjet Limited (ASX: WEB) have been crushed in 2020 because of the pandemic.

If you had a portfolio with significant weighting to the travel sector, you would be severely underwater right now compared to those with more balanced portfolios.

With that in mind, here are two top ASX shares you could diverse your portfolio with:

Betashares Nasdaq 100 ETF (ASX: NDQ)

The first option for investors to consider is the Betashares Nasdaq 100 ETF. As its name implies, this exchange traded fund gives investors exposure to the famous Nasdaq 100 index. These are 100 of the largest, non-financial businesses on the NASDAQ exchange. There are countless household names included in the fund such as Amazon, Apple, Costco, Netflix, Starbucks, and video conferencing provider Zoom. Given the positive outlooks for the companies on the index, I feel the exchange traded fund offers strong potential returns as well as diversity.

BHP Group Ltd聽(ASX: BHP)

If you're one of the many investors that doesn't have any exposure to the resources sector, then doing so could be an easy way to bring some diversification to your portfolio. My favourite option in the sector is BHP, just ahead of fellow mining giant Rio Tinto Limited (ASX: RIO). I like BHP due to its diverse and world class operations, their low costs, its strong balance sheet, and the bumper free cash flow it generates. The latter is likely to lead to generous dividend payments over the coming years.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BETANASDAQ ETF UNITS and Webjet Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO and Xero. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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