This is the ultimate tool to diversify your portfolio.
The broader stock market can be a loaded topic because the market is diverse, and different types of stocks go up and down at various times. Generally speaking, the S&P 500 is the most common benchmark. But as an index of 500 of America's most prominent companies, it leans toward large companies.
For example, did you know that the "Magnificent Seven" comprise about 28% of the S&P 500?
If you want to diversify your portfolio beyond the S&P 500, consider the Vanguard Total Stock Market ETF (VTI -0.09%). I'll explain how it differs from the S&P 500, the best way to buy shares, and whether it's a buy, sell, or hold today.
The problem with following just the S&P 500
Despite representing hundreds of companies, the S&P 500 isn't as diversified as you might think. As I said, more than a quarter of the index is made up of the Magnificent Seven, technology megastocks Nvidia, Microsoft, Meta Platforms, Amazon, Apple, Tesla, and Alphabet. How did this happen?
The index weightings are determined by each index member's respective market cap, so the immense growth of these companies feeds into a cycle. These stocks appreciate, and the index rebalances, giving them more weight, which creates more demand for the stocks, as funds tracking the S&P 500 must now buy more to follow along.
But nothing lasts forever. While many of the Magnificent Seven are enjoying impressive growth and could benefit from artificial intelligence (AI), the increasingly top-heavy nature of the index creates a risk that investors may want to avoid.
Vanguard's Total Stock Market ETF is easy diversification
That's why some investors may like Vanguard's Total Stock Market ETF. It's an exchange-traded fund (ETF) that touches on all types of stocks. It tracks the CRSP US Total Market Index, which spans more than 3,700 stocks and includes U.S. companies as small as just $15 million in market cap.
Admittedly, it weights stocks much like the S&P 500, so the Magnificent Seven still add up to 24% of the fund. Ultimately, you can't move too far away from the Magnificent Seven because they represent so much of the value in today's market.
The point isn't to say this fund is or isn't better than funds tracking the S&P 500, but some may find the Vanguard Total Stock Market ETF's additional reach appealing. Without it, many investors would never invest in such small companies.
If you're uncomfortable with the high technology exposure, you can balance your portfolio with specialized ETFs for other industries besides technology. Remember, ETFs are large groups of stocks trading under a single ticker. You can have investment exposure to thousands of companies with just a few ETFs.
It makes diversifying your investments beautifully simple. It's all about doing what you're comfortable with.
Buy, sell, or hold? Here is your game plan
As the old saying goes, time in the market beats timing the market. The U.S. stock market is sometimes volatile, but historically, it's consistently gained in value as the economy grows. You can see this below. Do investors get the occasional drop? Of course. However, look where the long-term trend points: up.
No matter what you read or hear from experts, nobody can accurately predict where the market will go from day to day or month to month. So instead of trying to time your investing, make a schedule where you consistently add new funds.
You may buy as the market goes up or down, but you'll average out over time and then ride the market's long-term upward motion. This is called dollar-cost averaging and it's the best way to invest for the long term. That makes Vanguard's Total Stock Market ETF a buy because you should always buy and hold it.
Follow this game plan, and you'll almost certainly build wealth over time.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Tesla, and Vanguard Index Funds-Vanguard Total Stock Market ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
