How can a small investor diversify their stock portfolio?
You can use index funds or exchange traded funds to track a
broader market index. This gives you exposure to many different
types of companies, without your individual research required.
Furthermore, your money is allocated between many sectors, so if
financial companies hit a rough patch, perhaps your oil companies
will be doing well. For large-cap (large-cap = big company!)
international exposure, there are a lot of good options for you.
The most diversified funds will have exposure to the largest
sectors of the US economy, and are generally linked to a broad
market index (like the Dow Jones or S&P). For diversification,
stick with the index funds, as they will incorporate a variety of
company types. The most widely held index fund type is the S&P
500 index funds. These, however do not diversify down into mid and
small caps. or international. One might want to ad these other
indeces as well for a more diversified portfolio. bonds also need
to be diversified - a total stock bond index fund is a good start
there...look at VTSAX, VGTSX and VBMFX as a starting point-other
companies have these type funds. If you wish to own individual
stocks, over 1100 companies have Dividend Reinvestment Plans
(DRPs). These are companies that, at a minimum, allow you to
reinvest your dividends in their stock at no fees. Many of these
companies have Optional Cash Purchase Plans (OCPs) that allow you
to purchase additional shares in the company at no fee. Usually,
you must own at least 1 share in the company. After that you can
register in the DRP and purchase shares with the dividends or
through the OCP. See the link for more information on DRPs.