Although it can be tempting to construct a portfolio filled to the brim with high growth tech shares, it is worth remembering that having too much exposure to one particular sector can be a very bad thing for a portfolio.
The travel sector is a prime example of why this is the case. Over the past few years the travel sector has been a great place to invest. The likes of Corporate Travel Management Ltd (ASX: CTD) and Webjet Limited (ASX: WEB) had generated mouth-watering returns for investors over the last five years, prior to the pandemic.
But then out of nowhere their business models were broken, through no fault of their own, and their shares are now trading at levels not seen since 2015. That's five years of gains gone in the blink of an eye.
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.
How can you diversify?
Buying companies with limited correlations is one way to diversify.
For example, the drivers of growth for electronic design company Altium Limited (ASX: ALU) and supermarket giant Coles Group Ltd (ASX: COL) are unrelated.
Given their positive outlooks, building a portfolio around these two could be a good start.
Alternatively, you could diversify your portfolio very quickly by investing in exchange traded funds.
The Betashares Nasdaq 100 ETF (ASX: NDQ) is one of my favourite exchange traded funds. It gives investors exposure to 100 of the largest, non-financial businesses on the NASDAQ exchange.
These include countless household names such as Amazon, Apple, Costco, Netflix, Starbucks, and Google parent, Alphabet. Though, given its high weighting to the technology sector, you might want to balance it out with other shares or exchange traded funds.
Another to consider is the iShares Global Healthcare ETF (ASX: IXJ). This exchange traded fund gives investors access to many of the biggest healthcare companies in the world.
This includes CSL Ltd (ASX: CSL), Johnson & Johnson, Novartis, Ramsay Health Care Limited (ASX: RHC), and Sanofi. I think it could generate strong returns for investors over the next decade due to the increasing demand for healthcare services because of ageing populations and increased chronic disease burden.
Overall, I feel if you follow these steps, you'll maximise your returns over the long run and lower the risk of shock events wiping out your gains.
