What is a well-diversified portfolio?

A well-diversified portfolio invests in many different asset classes. It has a relatively low allocation to any single security. As a result, if one security significantly underperforms, it won't have a meaningful impact on the portfolio's overall return. However, a well-diversified portfolio will typically deliver returns that roughly match those of the overall market.

What is considered a diversified portfolio?

A diversified portfolio contains a mix of asset types and investment vehicles. A diversified portfolio will typically hold several different stocks. An ideal diversified portfolio would include companies from various industries, at different stages of their growth cycle (e.g., early-stage and mature), some from foreign countries, and across a range of market capitalizations (small, mid, and large). In addition, it would hold bonds, cash, real estate, and commodities.

3 Tips for a Diversified Portfolio

A look at how to build a diversified portfolio.

By Matthew DiLallo – Updated May 10, 2026 at 9:20 AM EST

Key Points

Invest in at least 50 stocks across various sectors or use index funds for instant diversification.
Allocate part of your portfolio to fixed-income assets like bonds to reduce risk and volatility.
Enhance portfolio performance and stability by including real estate investments such as REITs.

Most people have heard the old saying, "Don't put all your eggs in one basket." The logic: If a farmer were to stumble while bringing the basket of eggs back from the henhouse, they could end up with a messy situation. Those words of wisdom go well beyond farming; they also perfectly encapsulate the idea of not risking all your money on a single investment.

One way investors can reduce their risk of a cracked nest egg is by diversifying their portfolio. Here's a look at what that means, as well as three tips to help you quickly diversify your investments.

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A hypothetical example of a diversified portfolio that invests in a variety of industries, countries and market caps. — Image source: The Motley Fool.

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Stock

A stock represents an ownership interest in a business. When a business wants to raise money, its board of directors determines the number of shares to issue.

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2. Put a portion of your portfolio into fixed income

Another important step in diversifying a portfolio is to allocate some capital to fixed-income assets, such as bonds. While this will reduce a portfolio's overall returns, it will also lessen the overall risk profile and volatility. Here's a look at some historical risk-return data on a variety of portfolio allocation models:

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Data source: Vanguard. Return data from 1926 to 2024.
Portfolio Mix	Average Annual Return	Best Year	Worst Year
100% bonds	5.0%	32.6%	(13.1%)
80% bonds and 20% stocks	6.4%	29.8%	(14.4%)
40% bonds and 60% stocks	8.8%	36.7%	(26.6%)
20% bonds and 80% stocks	9.7%	45.4%	(34.9%)
100% stocks	10.5%	54.2%	(43.1%)

Although adding bonds reduces a portfolio's average annual rate of return, it also tends to mute the worst-year loss and helps smooth out returns.

While picking bonds can be even more daunting than selecting stocks, there are easy ways to get some fixed-income exposure. One option is to buy a bond-focused exchange-traded fund (ETF), such as the iShares Core U.S. Aggregate Bond ETF (AGG -0.30%).

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3. Consider investing a portion in real estate

Investors who want to take their portfolio diversification to the next level should consider adding real estate to their mix. Real estate has historically increased a portfolio's total return while reducing its overall volatility.

An easy way to do this is by investing in real estate investment trusts (REITs), which own income-producing commercial real estate. REITs outperformed stocks over the last 25 years, with the FTSE Nareit All Equity REIT Index delivering an average annual total return of 10.8% (compared to 10.3% for the S&P 500).

Several studies have found that an optimal portfolio will include a 5% to 15% allocation to REITs. For example, a portfolio with 55% stocks, 35% bonds, and 10% REITs has historically outperformed a 60% stock/40% bond portfolio with only slightly more volatility while matching the returns of an 80% stock/20% bond portfolio with less volatility.

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FAQs on portfolio diversification

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About the Author

Matt DiLallo has been a contributing Motley Fool stock analyst specializing in the energy, industrials, and real estate sectors since 2012. He also covers dividend-paying stocks, pre-IPO companies, ETFs, and other investing topics. He holds an MBA from Liberty University.

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