Creating Portfolios with ETFs : Rule of Thumb for Diversification…
The degree of diversification is an independent choice for each investor. Because older investors have a shorter investment horizon and are generally more risk adverse; and younger investors have a longer investment horizon and are generally more risk tolerant, a general rule of thumb for investors creating a balanced portfolio is to match the weight in bonds to the age of the investor. For example, a 60 year old investor would consider having 60% or more allocated to bonds and 40% or less allocated to stocks. A 30 year old investor would consider having 30% in bonds and 70% in stocks.
Because Exchange Traded Funds or ETFs provide exposure to a diversified group of stocks or bonds in a single product, not only do they add diversification but they can also simplify the portfolio construction and management.
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