Investors often find themselves overwhelmed by the sheer number of choices available to them. This is known as “analysis paralysis,” where the fear of making the wrong decision leads to no decision at all.
With a vast array of stocks, bonds, and funds to choose from, it’s common to feel stuck, especially when each option seems to present a compelling opportunity.
However, my approach leans heavily towards diversification. The power of not putting all your eggs in one basket cannot be overstated.
So, if I were to invest $1,000 in November 2023, I’d be looking for an investment that spreads that money across a wide range of assets, sectors, and perhaps even countries. Here’s my exchange-traded fund (ETF) of choice.
Why I continue to favour diversification
The reason why diversification is often referred to as the only “free lunch” in investing is because it allows investors to reduce their risk without necessarily sacrificing potential returns.
By owning a broad mix of investments, you can smooth out the unpredictable performance of different asset classes over time. For instance, when the stock market declines, bonds often perform better, and vice versa, which can help to offset losses and stabilize returns.
When it comes to stocks, the goal of diversification is to own a range of companies from different industries and sizes and from various regions around the world.
This includes small, medium, and large companies, known as small, mid-, and large caps, which refer to their respective market capitalizations.
Diversification also means having exposure to all 11 sectors of the economy, such as technology, health care, financials, and energy, to avoid being overly affected by downturns in any single sector.
In addition to stocks, a well-diversified portfolio includes bonds of varying maturities and issuers. Owning both short-term and long-term bonds helps manage the risks associated with interest rate fluctuations.
Government bonds generally offer lower risk and returns, while corporate bonds can provide higher yields but come with increased risk. Having a mix of these helps to balance potential return with risk.
Why I like VGRO and chill
Embracing the “VGRO and chill” philosophy is about making investing simple yet effective. It revolves around investing in Vanguard Growth ETF Portfolio (TSX:VGRO) and then just letting the investment do its work without fussing over the daily market noise.
VGRO stands out for its exceptional diversification. It’s not just a single stock or a collection of a few; it’s a comprehensive package that includes thousands of stocks and bonds from across the globe.
This ETF holds a mix of other Vanguard ETFs, making it a sort of one-stop shop for investors. For a very reasonable management fee of 0.24%, you’re getting broad exposure to the world’s markets, which can be much more cost efficient than trying to create such a diversified portfolio on your own.
VGRO has an allocation of 80% in stocks and 20% in bonds. This blend aims to provide long-term capital growth with a moderate level of income, making it a suitable choice for investors with a medium- to high-risk tolerance who are looking for growth and are comfortable with some market ups and downs.
The beauty of VGRO is in its simplicity. Once you’ve invested in it, the main things you need to do are contribute funds regularly, reinvest the dividends you earn, and essentially, relax. This strategy is particularly appealing to investors who want to take a more hands-off approach.
For those who like a bit more engagement with their investments, VGRO can serve as the core holding of a portfolio. This core-satellite approach involves holding VGRO as the “core” for stable, diversified growth. At the same time, “satellites,” or additional investments, can be made in specific stocks where the investor has high conviction (and the Fool has some great suggestions below).