The stock market is a great place to invest for diversification. I'm going to highlight two ASX shares that could be excellent ideas.
Diversification is a powerful tool to help mitigate the risk of being overly exposed to a particular company or sector. But, I'd only want to diversify with investments that hopefully won't materially reduce my returns.
With that in mind, the two investments below are ones that really appeal to me.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)
Soul Patts is an investment house that has been operating for 120 years, and impressively it has paid a dividend to shareholders in every one of those years.
It provides exposure to a number of different sectors, including resources, telecommunications, financial services, agriculture, swimming schools, credit, funeral services and plenty more.
Every year, Soul Patts receives cash flow from its investment portfolio. With that money, it pays for its expenses, sends a majority of it to shareholders as a dividend and also invests in new opportunities for its portfolio.
I really like the investment style of this ASX share because it means the business can look for opportunities across a wide array of industries and asset classes. This can help it find the best ideas for returns and find strong diversification.
Of the entire S&P/ASX 200 Index (ASX: XJO), I think this business is the most likely to still be around in 50 years, thanks to its ability to change its portfolio as the years go by, enabling it to future-proof itself.
Vanguard MSCI Index International Shares ETF (ASX: VGS)
I think this is one of the most effective exchange-traded funds (ETFs) on the ASX for diversification.
It invests in the 'economically-developed' countries, with significant exposure to places like the US, Japan, the UK, the Netherlands, Switzerland, Canada, France, Germany and so on.
I'm calling this investment an ASX share because we can invest in it on the ASX.
It's an effective choice for diversification because it's invested in well over 1,000 businesses from across the world. It provides the biggest exposure to the large technology companies from the US including Microsoft, Nvidia, Alphabet, Apple, Amazon and Meta Platforms.
There are a number of sectors that have a sizeable allocation in the portfolio, including IT, financials, industrials, healthcare, consumer discretionary and communication services.
So, it gives investors diversification through the number of holdings, the country of listing and the various sectors. It really ticks the diversification box, in my opinion.
In terms of fees, it's very appealing because its annual cost is just 0.18%, which seems reasonable considering all the diversification it offers.
Finally, while past performance is not a guarantee of future performance, I think it's good to know this fund has delivered very satisfactory long-term returns.
In the five years to April 2025, it has delivered an average return per year of 14.6%. I believe a key factor in enabling that performance is that the VGS ETF portfolio has a return on equity (ROE) ratio of 19.2%, indicating strong profitability for shareholders.
