AS YOU CONSIDER how to diversify your stock portfolio—and how far to stray from the global market portfolio—you might look at the world of stocks through three prisms:
By geography. You will likely want exposure to U.S. shares, developed foreign stock markets such as Germany, Japan and the U.K., and also emerging markets like Brazil, China and India. Based on the allocations in the FTSE Global All Cap Index, roughly 50% of the world’s stock market value is accounted for by U.S. shares, 40% by developed foreign markets and 10% by emerging markets.
By company size. Stocks are often categorized as small, midsize and large (or “blue chip”) based on their total stock market value (otherwise known as their “capitalization” or “cap”). You will likely want exposure to all three categories, whether you’re buying U.S. stocks or investing in developed foreign markets.
By whether a company is considered a growth or value stock. Growth stocks are typically more expensive based on market yardsticks like dividend yield and price-earnings ratios, but they offer the prospect of rapidly growing revenues and profits. Value stocks aren’t growing so quickly, but they have the advantage of being less richly priced.
You should probably have exposure to all the different stock market segments described above. Fortunately, you can get that exposure with a relatively modest number of investments—thanks to mutual funds and exchange-traded index funds.
Next: Diversifying Bonds
Previous: Market Portfolio