Portfolio Diversification with multiple Stock index

A way to achieve broad diversification is with a portfolio of complementary indexes. The table below shows how you could have done investing this way and buying a range of U.S. large- and small-cap stocks (value-weighted), international stocks, and REITs.

As the table shows, this indexing strategy has substantially outperformed the S&P index over one, three, and five years. Of course, past performance is no guarantee of future results, but this sort of diversification has been an effective means of hedging your investment bets. The 25% international exposure in this portfolio might seem uncomfortably high to investors schooled in the "10% foreign" rule of thumb. If you're of that mind-set, then a 40% international stake

If you want to increase your chance of beating the S&P 500 year after year, one good way is to broaden your investment choices to include a generous mix of smaller caps and a healthy helping of international equities. Index mutual funds and ETFs offer an easy means to get that degree of breadth. On the other hand, if you limit your investment choices to the S&P 500, then you're unlikely to fare any better than the 75% of fund managers who routinely fail to beat the index.