Is diversification better
"There are probably 3-4 questions here.  Diversification - A good index, a low cost S&P fund or ETF can serve you very well. If you add an extended market index or just go with ""Total market"", that might be it for your stock allocation. I've seen people with 5 funds, and it didn't take much analysis to see the overlap was so significant, that the extra 4 funds added little, and 2 of the 5 would have been it. If you diversify by buying more ETFs or funds, be sure to see what they contain.  If you can go back in time, buy Apple, Google, Amazon, etc, and don't sell them. Individual stocks are fun to pick, but unless you put in your homework, are tough to succeed at. You need to be right at the buy side, and again to know if, and when, to sell. I bought Apple, for example, long ago, pre-last few splits. But, using responsible a approach, I sold a bit each time it doubled. Has I kept it all through the splits, I'd have $1M+ instead of the current $200K or so of stock. Can you tell which companies now have that kind of potential for the future?  The S&P has been just about double digit over 60 years. The average managed fund will lag the S&P over time, many will be combined with other funds or just close. Even with huge survivor bias, managed funds can't beat the index over time, on average. Aside from a small portion of stocks I've picked, I'm happy to get S&P less .02% in my 401(k). In aggregate, people actually do far worse due to horrific timing and some odd thing, called emotions." "Diversification tends to protect you from big losses. But it also tends to ""protect"" you from big gains. In any industry, some companies provide good products and services and prosper while others have problems and fail. (Or maybe the winners are just lucky or they paid off the right politicians, whatever, not the point here.) If you put all your money in one stock and they do well, you could make a bundle. But if you pick a loser, you could lose your entire investment. If you buy a little stock in each of many companies, then some will go up and some will go down, and your returns will be an average of how everyone in the industry is doing. Suppose I offered to bet you a large sum of money that if I roll a die, it will come up 6. You might be reluctant to take that bet, because you can't predict what number will come up on one roll of a die. But suppose I offered to bet you a large sum of money that a die will come up 6, 100 times in a row. You might well take that bet, because the chance that it will turn up 6 time after time after time is very low. You reduce risk by spreading your bets. Anyone who's bought stock has surely had times when he said, ""Oh man! If only I'd bought X ten years ago I'd be a millionaire now!"" But quite a few have also said, ""If only I'd sold X ten years ago I wouldn't have lost all this money!""  I recently bought a stock a stock that within a few months rose to 10 times what I paid for it ... and then a few months later the company went bankrupt and the stock was worth nothing. I knew the company was on a roller coaster when I bought the stock, I was gambling that they'd pull through and I'd make money. I guessed wrong. Fortunately I gambled an amount that I was willing to lose." "Diversification is the only real free lunch in finance (reduction in risk without any reduction in expected returns), so clearly every good answer to your question will be ""yes.""  Diversification is good.""  Let's talk about many details your question solicits. Many funds are already pretty diversified.  If you buy a mutual fund, you are generally already getting a large portion of the gains from diversification.  There is a very large difference between the unnecessary risk in your portfolio if you only hold a couple of stocks and if you hold a mutual fund.  Should you be diversified across mutual funds as well?  It depends on what your funds are.  Many funds, such as target-date funds, are intended to be your sole investment.  If you have funds covering every major asset class, then there may not be any additional benefit to buying other funds. You probably could not have picked your ""favorite fund"" early on.  As humans, we have cognitive biases that make us think we knew things early on that we did not.  I'm sure at some point at the very beginning you had a positive feeling toward that fund.  Today you regret not acting on it and putting all your money there.  But the number of such feelings is very large and if you acted on all those, you would do a lot of crazy and harmful things.  You didn't know early on which fund would do well.  You could just as well have had a good feeling about a fund that subsequently did much worse than your diversified portfolio did. The advice you have had about your portfolio probably isn't based on sound finance theory.  You say you have always kept your investments in line with your age.  This implies that you believe the guidelines given you by your broker or financial advisor are based in finance theory.  Generally speaking, they are not.  They are rules of thumb that seemed good to someone but are not rigorously proven either in theory or empirics.  For example the notion that you should slowly shift your investments from speculative to conservative as you age is not based on sound finance theory.  It just seems good to the people who give advice on such things.  Nothing particularly wrong with it, I guess, but it's not remotely on par with the general concept of being well-diversified.  The latter is extremely well established and verified, both in theory and in practice.  Don't confuse the concept of diversification with the specific advice you have received from your advisor. A fund averaging very good returns is not an anomaly--at least going forward it will not be.  There are many thousand funds and a large distribution in their historical performance.  Just by random chance, some funds will have a truly outstanding track record.  Perhaps the manager really was skilled.  However, very careful empirical testing has shown the following: (1) You, me, and people whose profession it is to select outperforming mutual funds are unable to reliably detect which ones will outperform, except in hindsight  (2) A fund that has outperformed, even over a long horizon, is not more likely to outperform in the future. No one is stopping you from putting all your money in that fund. Depending on its investment objective, you may even have decent diversification if you do so.  However, please be aware that if you move your money based on historical outperformance, you will be acting on the same cognitive bias that makes gamblers believe they are on a ""hot streak"" and ""can't lose.""  They can, and so can you. ======== Edit to answer a more specific line of questions =========== One of your questions is whether it makes sense to buy a number of mutual funds as part of your diversification strategy.  This is a slightly more subtle question and I will indicate where there is uncertainty in my answer.   Diversifying across asset classes.  Most of the gains from diversification are available in a single fund.  There is a lot of idiosyncratic risk in one or two stocks and much less in a collection of hundreds of stocks, which is what any mutual fund will hold.  Still,you will probably want at least a couple of funds in your portfolio.  I will list them from most important to least and I will assume the bulk of your portfolio is in a total US equity fund (or S&P500-style fund) so that you are almost completely diversified already. Risky Bonds.  These are corporate, municipal, sovereign debt, and long-term treasury debt funds. There is almost certainly a good deal to be gained by having a portion of your portfolio in bonds, and normally a total market fund will not include bond exposure.  Bonds fund returns are closely related to interest rate and inflation changes.  They are also exposed to some market risk but it's more efficient to get that from equity.  The bond market is very large, so if you did market weights you would have more in bonds than in equity.  Normally people do not do this, though.  Instead you can get the exposure to interest rates by holding a lesser amount in longer-term bonds, rather than more in shorter-term bonds.  I don't believe in shifting your weights toward nor away from this type of bond (as opposed to equity) as you age so if you are getting that advice, know that it is not well-founded in theory.  Whatever your relative weight in risky bonds when you are young is should also be your weight when you are older. International. There are probably some gains from having some exposure to international markets, although these have decreased over time as economies have become more integrated.  If we followed market weights, you would actually put half your equity weight in an international fund.  Because international funds are taxed differently (gains are always taxed at the short-term capital gains rate) and because they have higher management fees, most people make only a small investment to international funds, if any at all. Emerging markets  International funds often ignore emerging markets in order to maintain liquidity and low fees.  You can get some exposure to these markets through emerging markets funds.  However, the value of public equity in emerging markets is small when compared with that of developed markets, so according to finance theory, your investment in them should be small as well.  That's a theoretical, not an empirical result. Emerging market funds charge high fees as well, so this one is kind of up to your taste.  I can't say whether it will work out in the future. Real estate.  You may want to get exposure to real estate by buying a real-estate fund (REIT).  Though, if you own a house you are already exposed to the real estate market, perhaps more than you want to be.  REITs often invest in commercial real estate, which is a little different from the residential market. Small Cap.  Although total market funds invest in all capitalization levels, the market is so skewed toward large firms that many total market funds don't have any significant small cap exposure.  It's common for individuals to hold a small cap fund to compensate for this, but it's not actually required by investment theory.  In principle, the most diversified portfolio should be market-cap weighted, so small cap should have negligible weight in your portfolio.  Many people hold small cap because historically it has outperformed large cap firms of equal risk, but this trend is uncertain.  Many researchers feel that the small cap ""premium"" may have been a short-term artifact in the data.  Given these facts and the fact that small-cap funds charge higher fees, it may make sense to pass on this asset class.  Depends on your opinion and beliefs. Value (or Growth) Funds.  Half the market can be classed as ""value"", while the other half is ""growth.""  Your total market fund should have equal representation in both so there is no diversification reason to buy a special value or growth fund.  Historically, value funds have outperformed over long horizons and many researchers think this will continue, but it's not exactly mandated by the theory.  If you choose to skew your portfolio by buying one of these, it should be a value fund. Sector funds.  There is, in general, no diversification reason to buy funds that invest in a particular sector.  If you are trying to hedge your income (like trying to avoid investing in the tech sector because you work in that sector) or your costs (buying energy because you buy use a disproportionate amount of energy) I could imagine you buying one of these funds. Risk-free bonds.  Funds specializing in short-term treasuries or short-term high-quality bonds of other types are basically a substitute for a savings account, CD, money market fund, or other cash equivalent.  Use as appropriate but there is little diversification here per se. In short, there is some value in diversifying across asset classes, and it is open to opinion how much you should do.  Less well-justified is diversifying across managers within the same asset class.  There's very little if any advantage to doing that."
"An investment portfolio is typically divided into three components: All three of those can be accessed through mutual funds or ETFs. A 401(k) will probably have a small set of mutual funds for you to pick from. Mutual funds may charge you silly expenses if you pick a bad one. Look at the prospectus for the expense ratio. If it's over 1% you're definitely paying too much. If it's over 0.5% you're probably paying too much. If it's less than 0.1% you have a really good deal. US stocks are generally the core holding until you move into retirement (or get close to spending the money on something else if it's not invested for retirement). International stocks are riskier than US stocks, but provide opportunity for diversification and better returns than the US stocks. Bonds, or fixed-income investments, are generally very safe, but have limited opportunities for returns. They tend to do better when stocks are doing poorly. When you've got a while to invest, you should be looking at riskier investments; when you don't, you should be looking for safer investments. A quick (and rough) rule of thumb is that ""your age should match the portion of your portfolio in bonds"". So if you're 50 years old and approaching retirement in 15 years or so, you should have about 50% in bonds. Roughly.  People whose employment and future income is particularly tied to one sector of the market would also do well to avoid investing there, because they already are at risk if it performs badly. For instance, if you work in the technology sector, loading up on tech stocks is extra risky: if there's a big bust, you're not just out of a job, your portfolio is dead as well. More exotic options are available to diversify a portfolio: While many portfolios could benefit from these sorts of holdings, they come with their own advantages and disadvantages and should be researched carefully before taking a significant stake in them." Asset Allocation serves many purposes, not just mitigating risk via a diversification of asset classes, but also allowing you to take a level of risk that is appropriate for a given investor at a given time by how much is allocated to which asset classes. A younger investor with a longer timeframe, may wish to take a lot more risk, investing heavily in equities, and perhaps managed funds that are of the 'aggressive growth' variety, seeking better than market returns. Someone a little older may wish to pull back a bit, especially after a bull market has brought them substantial gains, and begin to 'take money off the table' perhaps by starting to establish some fixed income positions, or pulling back to slightly less risky index,  'value' or 'balanced' funds. An investor who is near or in retirement will generally want even less risk, going to a much more balanced approach with half or more of their investments in fixed income, and the remainder often in income producing 'blue chip' type stocks, or 'income funds'.  This allows them to protect a good amount of their wealth from potential loss at a time when they have to be able to depend on it for a majority of their income. An institution such as Yale has very different concerns, and may always be in a more aggressive 'long term' mode since 'retirement' is not a factor for them.  They are willing to invest mostly in very aggressive ways, using diversification to protect them from one of those choices 'tanking' but still overall taking a pretty high level of risk, much more so than might be appropriate for an individual who will generally need to seek safety and to preserve gains as they get older.  For example look at the PDF that @JLDugger linked, and observe the overall risk level that Yale is taking, and in addition observe the large allocations they make to things like private equity with a 27%+ risk level compared to their very small amount of fixed income with a 10% risk level.  Yale has a very long time horizon and invests in a way that is atypical of the needs and concerns of an individual investor.  They also have as you pointed out, the economy of scale (with something like #17B in assets?) to afford to hire proven experts, and their own internal PHD level experts to watch over the whole thing, all of which very few individual investors have. For either class of investor, diversification, is a means to mitigate risk by not having all your eggs in one basket.  Via having multiple different investments (such as picking multiple individual stocks, or aggressive funds with different approaches, or just an index fund to get multiple stocks) you are protected from being wiped out as might happen if a single choice might fail.  For example imagine what would have happened if you had in 2005 put all your money into a single stock with a company that had been showing record profits  such as Lehman Brothers, and left it there until 2008 when the stock tanked. or even faster collapses such as Enron, etc that all 'looked great' up until shortly after they failed utterly.   Being allocated across multiple asset classes provides some diversification all on it's own, but you can also be diversified within a class. Yale uses the diversification across several asset classes to have lower risk than being invested in a single asset class such as private equity. But their allocation places much more of their funds in high risk classes and much less of their funds in the lowest risk classes such as fixed income. Diversification and convenience: Is .15-0.35% fee worth it? It depends on your net worth, amount you invest and value of your time (if you have high net worth and low cost of your time the fee is highier then in case when you have low net worth but high cost of time - so Betterment seems to be a better option to young professional just after college then to someone already retired), your interest in finance, your willpower etc. Is Betterment allocation better then pure SPY? From what I understand about finance theory - yes. EDIT (as requested) I don't have any affiliation with any financial institution as far as I know. I opened it to get used to just investing as oppose to saving and ups and downs of market (and read up on the portfolio management, especially index funds) and I guess it worked well for me. I plan to move out entirely out of it once the cost of the account would be more then paying for a few coffees and move the account to Vanguard, Schwab or something similar.  In other accounts (HSA/...) I use simpler portfolio then the Betterment one (US Total, Small Value, Developed, Emerging and Bonds) but there are people who use simpler (search for 3 fund portfolio). "Some of the other answers recommended peer-to-peer lending and property markets. I would not invest in either of these. Firstly, peer-to-peer lending is not a traditional investment and we may not have enough historical data for the risk-to-return ratio. Secondly, property investments have a great risk unless you diversify, which requires a huge portfolio. Crowd-funding for one property is not a traditional investment, and may have drawbacks. For example, what if you disagree with other crowd-funders about the required repairs for the property? If you invest in the property market, I recommend a well-diversified fund that owns many properties. Beware of high debt leverage used to enhance returns (and, at the same time, risk) and high fees when selecting a fund. However, traditionally it has been a better choice to invest in stocks than to invest in property market. Beware of anyone who says that the property market is ""too good to not get into"" without specifying which part of the world is meant. Note also that many companies invest in properties, so if you invest only in a well-diversified stock index fund, you may already have property investments in your portfolio! However, in your case I would keep the money in risk-free assets, i.e. bank savings or a genuine low-cost money market fund (i.e. one that doesn't invest in corporate debt or in variable-rate loans which have short duration but long maturity). The reason is that you're going to be unemployed soon, and thus, you may need the money soon. If you have an investment horizon of, say, 10 years, then I would throw stocks into the mix, and if you're saving for retirement, then I would go all in to stocks. In the part of the world where I live in, money market funds generally have better return than bank savings, and better diversification too. However, your 2.8% interest sounds rather high (the money market fund I have in the past invested in currently yields at 0.02%, but then again I live in the eurozone), so be sure to get estimates for the yields of different risk-free assets. So, my advice for investing is simple: risk-free assets for short time horizon, a mixture of stocks and risk-free assets for medium time horizon, and only stocks for long time horizon. In any case, you need a small emergency fund, too, which you should consider a thing separate from your investments. My emergency fund is 20 000 EUR. Your 50 000 AUD is bit more than 30 000 EUR, so you don't really have that much money to invest, only a bit more than a reasonably sized emergency fund. But then again, I live in rental property, so my expenses are probably higher than yours. If you can foresee a very long time horizon for part of your investment, you could perhaps invest 50% of your money to stocks (preference being a geographically diversified index fund or a number of index funds), but I wouldn't invest more because of the need for an emergency fund." Index funds are good for diversifying risk. For people who don't have a large sum of money to invest, holding all the different types of stocks in the index is both very expensive and not practical because you incur too many transaction costs. For an index funds, the main advantages are that costs are pooled, and investors can invest a smaller amount that they would if they bought all the different stocks individually. Naturally, if you wanted to figure out the percentage composition of the index and invest directly it would be possible, albeit tedious. "All of these frameworks, Markowitz, Mean/CVaR, CARA, etc  sit inside a more general framework which is that ""returns are good"" and ""risk/lack of certainty in the returns is bad"", and there's a tradeoff between the two encoded as some kind of risk aversion number.  You can measure ""lack of certainty in returns"" by vol, CVaR, weighted sum of higher moments, but even sector/region concentration.  Similarly do I want more ""returns"" or ""log returns"" or ""sqrt returns"" in the context of this tradeoff?  You don't need any formal notion of utility at that point - and I don't know what formal ideas of utility beyond ""I want more returns and less risk"" really buys you. The Sharpe ratio only really gets its meaning because you've got some formal asset-pricing notion of utility.   In my view the moment that you're putting constraints on the portfolio (e.g. long only, max weights, don't deviate too much from the benchmark ...) - really you're operating in this more general framework anyway and you're not in ""utility-land"" anymore." "Of course. ""Best"" is a subjective term. However relying on the resources of the larger institutions by pooling with them will definitely reduce your own burden with regards to the research and keeping track. So yes, investing in mutual funds and ETFs is a very sound strategy. It would be better to diversify, and not to invest all your money in one fund, or in one industry/area. That said, there are more than enough individuals who do their own research and stock picking and invest, with various degrees of success, in individual securities. Some also employe more advanced strategies such as leveraging, options, futures, margins, etc. These advance strategies come at a greater risk, but may bring a greater rewards as well. So the answer to the question in the subject line is YES. For all the rest - there's no one right or wrong answer, it depends greatly on your abilities, time, risk tolerance, cash available to invest, etc etc." "If I were in your shoes I'd probably take the Vanguard Total Market fund with Admiral shares, then worry about further diversification when there is more in the account. Many times when you ""diversify"" in to multiple funds you end up with a lot of specific security overlap.  A lot of the big S&P 500 constituents will be in all of them, etc.  So while the 10 or so basis points difference in expense ratio doesn't seem like enough of a reason NOT to spread in to multiple funds, once you split up the money between Large, Mid, Small cap funds and Growth, Value, Dividend funds you'll probably have a collection of holdings that looks substantially similar to a total market fund anyway. Unless you're looking for international or some specific industry segment exposure and all of the money is going to equities anyway, an inexpensive total market fund makes a lot of sense."