When investing, it's important to have a diversified portfolio, experts say. Not sure what that means? You're not alone. One in 4 Americans say they don't know or have no opinion on whether their investments are diversified, according to a new survey of 2,200 U.S. adults that CNBC Make It performed in conjunction with Morning Consult.
Another 42% of respondents say they don't actively monitor to make sure their investments are diversified, and only about 34% of people say they do.
"I don't think most Americans have ever truly been educated on investing and diversification," Phoenix-based financial advisor Ashley Folkes of Moors & Cabot tells CNBC Make It. But learning is empowering, Folkes says, and gives you the confidence to make better decisions.
Personal finance coach Ramit Sethi agrees: Understanding diversification and making sure your portfolio meets that standard is an important way to build long-term wealth, he says. That's because spreading out your money across different investments will reduce your overall risk so that you won't lose everything if, for example, the market tanks.
Why balancing your investments is important
Most people should aim to have a balanced portfolio, which means that you have your money invested in different types of assets, such as stocks and bonds.
You don't want all your money invested in the same place. Instead, you want to set up your investments in a way that when one sector of the market is dipping, you are also invested somewhere that is performing well.
Bonds typically act as a "counterweight" to stocks, for example, Sethi explains, so when stocks fall, bond prices often rise and therefore reduce the overall risk that you'll lose money. You generally want some of both in your investment mix.
Just having stocks and bonds is not enough to keep your risk low, though. You also need to diversify your investments within these asset classes.
Creating and maintaining a balanced, diversified portfolio can take a lot of work if you're doing it yourself. Markets aren't static, so you'll need to rebalance periodically to make sure that your investments are not "way out of whack," Folkes says.
If it's overwhelming, you can always work with a professional or invest through so-called robo-advisors, which typically use algorithms to build and manage a portfolio for you.
How diversified your portfolio should be
Diversifying minimizes the risk of an individual stock or company within a portfolio by spreading it around to several stocks in different industries, countries and asset classes, says Oklahoma City-based financial planner Amy Hubble of Radix Financial.
With stocks, for example, you typically want some of your money invested with big companies, some with international companies and some with small companies. The same is true with bonds. You want to pick bonds from different issuers, the federal government, corporate bonds, and municipal bonds from state and local governments.
Most investors get diversification through the use of mutual funds, index funds or exchange-traded funds because these investing vehicles can track a wide range of assets. But just putting all your money in one fund does not guarantee that you have a balanced portfolio, so you may need to invest in several funds to get exposure to different markets and sectors.
Generally, to be diversified, you should hold at least 20-25 names within a portfolio of individual stocks and they should each represent a different industry, Hubble says. You should never invest or hold more than 10% of your personal investments within a single stock or company, she adds, especially if that stock is also your employer.
How to automate and let someone else do the work
When it comes to retirement accounts, you can ensure you always have an on-track, diversified portfolio by buying something called a target-date fund. These are a collection of funds that offer "automatic diversification," Sethi says.
"Target-date funds automatically pick a blend of investments for you based on your approximate age," he says. They start off more aggressive and then move to more conservative investments as you get closer to retirement. The fund does the work to make sure you have a balanced investment approach, so all you have to do is add money.
Target-date funds may not be perfect for everyone, he says, but most people will find them to be low cost, tax efficient and easy to use. Otherwise, you'll need to either build and manage the portfolio yourself or seek out professional help.
"If you're nervous about investing and just starting out, your biggest danger isn't having a portfolio that's too risky. It's being lazy and overwhelmed and not doing any investing at all," Sethi says.
"That's why it's important to understand the basics, but not get wrapped up in all the variables and choices," he adds.
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