Honest question for some of the more seasoned investors. What do you consider a "diversified" portfolio? Is it just a mix of Equity and Fixed Income, is it a mix of multiple sectors (tech, financials, consumer staples etc) or is it a mix of different growth & income? If it is multiple sectors how many different sectors do you like to be spread out amongst?
It depends on what your goals are. If you are content to ride along with the broad market, you can stick with generic mutual funds or ETFs. Especially among mutual funds, there's a lot of overlap in what they hold, within a category: one "balanced growth" fund is going to be pretty similar to another. So you can be set with a few differently-slanted funds that have low expenses. I'm a fan of FSKAX, Fidelity's "Total Market" fund, which charges almost nothing.
If you hold individual stocks, then presumably you're trying to outperform the overall market -- you're hoping to find what investors call "alpha." So then it's a game of how confident you are in your guesses and how much risk you're willing to take on.
I personally am trying to outperform the market a little, and I'm taking on moderate risk. About half of our portfolio is in 40 individual stocks, some of which are themselves quite conservative (Kimberly-Clark, AT&T, Pfizer) but many of which are pretty speculative. The other half is mutual funds, which have a defensive tilt, including 25% in bonds.
You can look at a stock's "beta" to get a sense of how volatile it is. That's a measure of how much it goes up and down compared to the market as a whole; 1.00 is average. KMB, T, and PFE are all 0.75 or less, which basically means they are boring. But you can find some stocks, even big names, that are 1.5 or higher -- Tesla (which we don't own) is at 2.
As for sectors, I look at the S&P 500 as a weighting benchmark and then modify our weightings according to, well, pretty much gut feeling. So for example the S&P is around 14% in healthcare, but I feel like most of that sector is overpriced, so our portfolio is only 9% healthcare. On the other hand, the S&P is less than 3% energy, but I believe that alternative energy still has a lot of growth potential, so we're almost 6% in that sector. (The energy sector in the S&P is mainly fossil fuels, but I'm trying to be ESG-conscious in our portfolio.) I steer away from consumer discretionary because I have a general distrust of that sector, although we hold some, including "quasi-staples" like Goodyear and Hanes (people aren't going to stop needing tires or underwear, and Hanes even pays a solid dividend). I was about to sell Wyndham in the mid $70s, because I felt like it had come as far as it could, but then it cratered, so I'm stuck with it for a while.
One way of thinking about diversification is that, almost always, something somewhere is going up. And often things go up in surges, like a bunch of money will suddenly flow into materials (which is the hot sector right now) for some reason. So if you have a piece of that action, you can be in the right place at the right time.
I force myself to be conservative with the mutual funds because otherwise it's too tempting to keep riding the hot hand everywhere. All good things must come to an end, and you want to be set up so that the next time the market drops 20% -- and make no mistake, it will -- you lose only something like 12-15%.
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