To achieve diversification within a stock-only portfolio, consider combining the S&P 500, small-cap stocks, and value stocks. Despite all being within the same asset class, these categories behave differently under various market conditions, thereby reducing overall risk. Historically, both value and small-cap stocks have tended to provide higher returns over the long run. Again, this portfolio is for 20+ years.
A well-structured portfolio might include:
S&P 500 (e.g., Vanguard S&P 500 ETF (VOO), SPDR Portfolio S&P 500 ETF (SPLG), iShares Core S&P 500 ETF (IVV), Schwab S&P 500 Index Fund (SWPPX))
small-cap stocks (e.g., Vanguard Small-Cap Growth ETF (VBK), iShares Morningstar Small-Cap Growth ETF (ISCG), Vanguard Small-Cap Growth Index Fund Admiral Shares (VSGAX), SPDR Portfolio S&P 600 Small Cap ETF (SPSM))
value stocks (e.g., Vanguard Value ETF (VTV), Fidelity Value Factor ETF (FVAL), Vanguard Value Index Fund Admiral Shares (VVIAX))
By including different types of stocks, you spread risk. The S&P 500 offers stability and broad market exposure, small-cap stocks offer growth potential, and value stocks provide a cushion during downturns.
Despite diversification, this portfolio is still exposed to overall market risk since all components are equities. Small-cap stocks can be more volatile than large-cap stocks, which might not suit all investors. The S&P 500 is heavily weighted towards certain sectors like technology, which can introduce sector-specific risks.