In the twenty years I have been investing, I'm currently the most diversified as I've ever been in any of my portfolios. I only own two ETFs, but these two Exchange Traded Funds mirror the performance of major domestic indexes and both are to the short side. The ProShares Ultra Short S&P 500 (SDS) tracks the S&P 500 which consists of the largest 500 American securities by market cap and the Direxion Small Cap Bear 3X Shares (TZA) emulates the return of the Russel 2000. I tend to be an aggressive investor, so I am usually running a concentrated portfolio with very little diversification. If I had been diversified throughout the years, I wouldn't have tripled my portfolio in a matter of one or two years twice in previous bubbles. I also wouldn't have lost as much after the party was over as I hung onto my positions like Captain Ahab harpooning the great white whale. Always remember that tried and true Wall Street adage of "don't confuse brains with a bull market". I learned the hard way which is why I'm short right now because I really believe in my convictions of a double dip recession.
I have been asked what I would do if I wasn't so aggressive in my investments and took more of a laissez-faire attitude in portfolio management. After all, this is what most people would prefer to do, take a hands off approach and let their money compound at a reasonable rate. Investing in the stock market can be very confusing with all of the choices available and even if you know what you are doing, you can get burned like the majority of people did this past year. If I didn't have an ego large enough to think I can beat the market, then I would be as diversified as possible with index ETFs covering domestic and foreign securities as well as good old American bonds.
Which ETFs would I purchase to build a diversified conservative portfolio? For me the prudent course of action would be to invest in ETFs offered by Vanguard because they have the lowest expense ratios. As a side note here, it should be mentioned that pioneer discount broker Charles Schwab launched some index ETFs this week with a slightly lower expanse ratio than the Vanguard offerings, but they are new to the game and will have very low volumes at the outset. Vanguard is synonymous with index funds and really knows what they are doing are far as managing their product is concerned. I'll stick with the tried and true.
For my laissez-faire portfolio, I would divide my cash into the equal parts of roughly 33% each and invest my money in the following three ETFs offered by Vanguard. For domestic coverage, the Vanguard Total Stock Market ETF (VTI) tracks the MSCI U.S. Broad Market Index. This contains 1,200 - 1,300 of the largest cap American stocks. For foreign exposure, the Vanguard Total World Stock ETF (VT) tracks the FTSE All-World Index of 2,900 stocks from 47 countries. Finally, for a bond allocation, the Vanguard Total Bond Market ETF (BND) tracks the Barclay's Capital U.S. Aggregate Bond Index. I could easily invest my money in a strategy like this and come back in 20 or 30 years and be ahead of the game as long as there was no Nuclear Winter. Would I ever use this strategy? Maybe some day down the line, but right now I've got my mojo working on something more active. Stay tuned.