Q. How many ETFs do I need to own to have a balanced and diversified portfolio? – C.L. in Plano, TX
A. One of the common investing fallacies is that the number of holdings within your investment portfolio should increase as your portfolio’s value increases. This is wrong. Why? Because having a well-rounded investment portfolio is never determined by how many ETFs a person owns, but rather, making sure the funds that you own are invested in asset classes that are distinctly different from each other.
For example, a portfolio that holds just five ETFs in different investment categories like international stocks (NYSEARCA:CWI), U.S. stocks (NYSEARCA:SCHB), commodities (NYSEARCA:USCI), bonds (NYSEARCA:BNDX), and global real estate (NYSEARCA:RWO) would definitely be more balanced and diversified versus a portfolio that owns 10 large cap stock ETFs (NYSEARCA:VV) and nothing else. Put another way, a well-rounded portfolio can achieve diversification by owning just a few ETFs that are distributed across a variety of different asset classes. The key is always variety, not quantity.
In summary, regardless of whether your investments are worth $1,000, $100,000, or $100 million, you don’t need a complicated portfolio with lots of holdings to achieve a well-rounded state. Just a few carefully selected ETFs in different areas can and will get the job done.