One of the common concerns we often hear around the GRSC community is about diversification . So, in this episode, we are tackling a specific question from one of our listeners.

Here's the exact voice note we received from Rachel Smith:

“Hey Tash and Ana, full confession here: investing and reading investing books does not turn me on. I do have shares – ETFs in the S&P 500 and the ASX 200. And I was wondering, should I be diversifying even more and getting more ETFs?

I am, I suppose, just not that excited about learning all that lingo but wonder if it's absolutely necessary. Or, should I stick to what feels good and feels easy, which is the current ETFs I have and having payments running on automation?

Perhaps this is a mindset and attitude block for me. However, I'd love to spend my time investing in building my business instead, which is why I'm asking this question.”

First up, simple investing is great for folks who love doing something else

We love this question because it hits home for so many of us. So many of us are always wondering if we should be doing something more, something better. We totally get it – that’s personal finance for you.

We also appreciate this question because it highlights an important point: the mental load. Not all of us enjoy the minutiae of building a portfolio. And, more often than not, you can avoid a lot of regret when you don’t overthink these things. In other words, the average investor may be better off keeping their investments simple and long-term.

If you’re investing in two broad-based ETFs (in this case, the S&P 500 and ASX 200), you’re already ahead of many folks struggling to get started. So, it’s worth asking yourself: “Do I really need to nitpick my strategy if I’m already invested in two major markets, and I enjoy this simplicity?”

After all, it’s hard to predict that any other strategy will outperform this one enough to matter. Because, historically, it’s been time in the market that builds wealth. In fact, a 2022 study by S&P Global concluded that, over the span of a decade, about 90% of large-cap fund managers underperformed in comparison to an S&P 500 index. Of course, the past doesn't predict the future – in investing or any other area of life. However, figures like these highlight that investing isn't always a choice between minimal effort and steady returns. Sometimes, you can have both.

If you’ve found a system that works, like automating your investments, there’s no reason to stress over strategy every time. Instead, you can free up your mental space for other important things. Maybe you want to build a business or focus on increasing your income. If you can do more of what matters to you, that's a definite win in our book.

However, if you want to diversify beyond two ETFs, here are some things to consider

We understand there are different folks with different goals and preferences in mind. So, expanding beyond two ETFs can sometimes become the next step.

In general, there are few factors to consider when you’re diversifying a portfolio. But, remember, you don’t actually have to apply every single one we mention. These are just talking points to help you consider whichever approach makes sense for you.

1. Geographic concentration

Many investors lean towards big names like the S&P 500 in the US or the ASX 200 in Australia. These indices are heavyweights for a reason. They cover the major players in two of the world’s most robust economies. And if you’re investing only in these two countries, that’s not necessarily a bad thing.

However, they don't give you direct exposure to other markets in Asia, Europe, or South America. And global diversification is worth considering because different markets can perform well at different times. Put another way, if one market dips, others could make sure the ETF doesn’t become too volatile.

Sure, some companies in the S&P 500 like Starbucks operate globally. And this might seem like you’re covering a lot of ground. But, the financial performance of these companies still trickles back to the US market.

2. Market exposure

Most ETFs that track major indices focus on ‘large-cap’ shares. These are shares of companies that have a history of stability and have a proven track record.
With that said, they do not represent the whole market. Large-cap ETFs tend to overlook the ’small-cap’ shares , meaning smaller (and possibly faster-growing) companies. So, it might be worth looking at total market ETFs that cover all large-, mid- and small-cap shares within an index.

3. Asset diversification

Another dimension to consider is different types of assets. Shares and ETFs are the most popular, but they’re just one part of the investment world. Real estate, commodities, and bonds can diversify your holdings even further. And these assets often react differently to market changes than shares/ETFs do.

For instance, when the market is down, bonds might remain more stable, which could protect your portfolio from too much ups and downs. Commodities and real estate are popular too because they can serve as a hedge against inflation . Some folks include them in their portfolio to protect the purchasing power of their money over the long term.

4. Rebalancing portfolio

Over time, some ETFs might grow faster than others and start to overshadow everything else. In investing language, these funds become ‘overweighted’.

So, what does this mean for you? You’ve probably guessed it – investing risk is concentrated in those overweighted assets. Hence, your portfolio value becomes more vulnerable to market swings in that area.

This is where rebalancing your portfolio comes in. This means adjusting your portfolio to get back to your preferred balance between investments. In the example above, there are two ways you can rebalance your portfolio until the overweighted ETF comes down to a comfortable level.

Rebalancing is also useful for keeping your investments aligned with your original goal. Imagine you started with a mix where a growth ETF was just 50% of your portfolio, but now it's taking over. Perhaps your goals have shifted a bit. And now you're looking for more steady income from dividends. This could be the time to rebalance using either of the two methods above.

Keeping it simple with a two-fund ETF portfolio (S&P 500 and ASX 200)

First, a word of caution…

Arguably, investing is simple but not easy. This really shows when we talk about diversification. How many ETFs are too many ? And how few are too few?

First up, less diversification – l ike sticking with just S&P 500 ETF – might sound straightforward. But, like any investing strategy, it comes with its fair share of risks. It’s great when the U.S. market performs well. But if inflation or a recession happens, investing during a market downturn can be quite unsettling.

On the other end of the spectrum, over-diversifying can be just as risky as not diversifying at all. For instance, if you’re investing $600/month across 12 funds, you can’t build up enough in any one place to really get that compounding power going. And if many of these funds overlap in assets they hold, you're not actually diversifying your risk. Instead, you're doubling down on it.

Of course, each of these investments can have wildly different returns too. And all those returns can cancel each other out. It's like having a team where everyone is running in different directions. There’s a chance you might end up pretty much staying in the same spot.

The other thing is that over-diversifying often means more fees and taxes, which can eat into your overall gains. And even if you’re paying the lowest of fees, you’re still giving up a lot of time and energy to manage your portfolio.

Some ETF options if you’re already invested in S&P 500 and ASX 200

With that said, a lot of folks find that sticking to around two or three ETFs gives them enough diversification. Typically, a portfolio like that covers Australia, the US and international markets without making things too complicated.

Before we go any further, though, a quick reminder: what we’re sharing here isn't about nudging you one way or another. Our chat is only a general exploration of how you might think about diversifying an ETF portfolio. In other words, this isn’t professional or specific personal advice.

If you do explore the ETFs we mention, just be aware you could end up more heavily invested in certain markets. This is something to consider, especially if you’re already invested in S&P 500 and ASX 200 ETFs.

Generally speaking, if you’ve been investing in these two ETFs and feeling good about it, that's a solid start. But, if you ever wonder, "Am I diversified enough?" there are possible options you can add…

You might consider a peek at something like the Vanguard Diversified High Growth Fund (ASX:VDHG) or the BetaShares Diversified All Growth Fund (ASX:DHHF) . These funds give you a slice of global markets, including emerging economies, without the hassle of managing multiple assets. It might be worth noting that if you are investing in these along with your two original ETFs, there may be some overlap with your investments. If so, you'll need to consider how this impacts your overall strategy.

One thing you may notice about VDGH is that it’s not purely about shares. The fund mixes in about 10% bonds to add stability to a portfolio during a market downturn. On the other hand, DHHF sticks to 100% shares and leans heavily on a capital growth strategy.

Diversified ETFs like these can be practically self-maintaining. These funds rebalance themselves to stay aligned with your initial strategy without any heavy lifting on your part. So, they may resonate with those who prefer a “set and forget” strategy.

While you’re here, it’s also worth thinking about your overall financial landscape. Many of us here in Australia have superannuation , which is typically diversified. So, even if you’re only holding S&P 500 and ASX 200 ETFs, you might already be more diversified than you think.

Again, our chat here isn’t a cue for you to invest in one fund or another. It’s just us thinking aloud about how one might diversify their portfolio a bit more.

Then again, you don’t have to force yourself into investing more…

As we’ve said earlier, not everybody has the bandwidth to think about the small details of investing. And that’s perfectly okay. If you’re splitting your time between investing and running a business, your mental energy is precious. It's fair to set up your investing, do your research initially, and then focus your energy into your business.

If you're feeling unsure, it's also perfectly fine not to push yourself into something that feels off. You don’t need the perfect investment plan every single day. Stick with your current investments and give it some time.

If your current investment strategy – say, sticking with just S&P 500 and the ASX 200 – feels right, it's probably enough for now. You can always come back to it later and tweak things as necessary.

Also, if you're beginning with, say, $2,000, buying four or five ETFs could get expensive really fast because of fees (not to mention the other risks of over-diversifying). So, for many of us, it makes more sense to build up a core portfolio first. You can then think about adding more as you increase your income or savings.

Lastly, there’s never a bad time to seek advice from a financial adviser or a tax accountant. They help clarify the complex stuff, so you can focus more on what you do best. And when you're ready, they can make sure that what you're about to invest in makes the most sense to you.

Final thoughts

We’ve reached the tail end of today’s dive into a question from the community. If this conversation raises more questions for you, we’ve made a shortlist of articles that could help:

• “ What is a diversified ETF? Aren't ETFs already diversified? ”
• “ How do I create a diversified portfolio when investing? ”
• “ The ultimate guide to diversified ETFs for Australians ”
• “ Diversifying with other assets ”
• “ Diversified ETFs or DIY? ”

And, finally, we love getting your thoughts and questions after each episode. So, leave a voice note through the link in our show notes. Or find us on Instagram at @getrichslowclub , or directly at @tasinvest and @anakresina .

Happy investing!

Tash and Ana