Diversifying

The Vanguard Total Bond Market ETF (BND) is a stock that is made up of numerous U.S. investment grade bonds. The ETF’s goal is to keep pace with the U.S. bond market returns. This investment choice is more appropriate for medium to long-term goals when looking for reliable income. It is also appropriate for diversifying your portfolio to give you less risk which is what I recommend using it for.

To keep things simple, I will use SPY again to show you the effects of diversifying your portfolio. I ran 100 different allocations between SPY and BND. In doing some I was able to find a portfolio that offers four times less risk than investing in SPY and you only give up half of your return. When you allocate 6% of your investment in SPY and 94% in BND you are able to get a 4% yearly return on your investment. Every 1% more of your investment that you put into SPY will increase your return however will also increase the risk as well.

Whenever you invest you should always diversify. Leaving all of your money in one investment substantially increases your risk because it’s all dependent on that one company. Investing in ETFs is always smart because its already a portfolio diversified by multiple investments being monitored by a money manager.