You've heard it before and you'll hear it again – diversifying your ASX shares is critical.
I often catch myself forgetting about diversification. It's easy to see companies like Pointsbet Holdings Ltd (ASX: PBH) rocket higher and wonder what could have been.
Daily moves are hard to ignore, particularly in times like these when there are regular big swings. However, it's important to remember the value of a long-term investing perspective and the benefits of diversification.
Why diversifying your ASX shares is so important
Diversification is all about spreading the risk across your portfolio. Generally, the more risk you take on the more return you should see to compensate for that.
That means buying shares in Commonwealth Bank of Australia Ltd (ASX: CBA) should give you a better return than holding cash or buying its bonds.
However, there's a reason why people like to diversify their holdings. Over the long-term, you can spread the individual risk of each share such as a scandal, loss of earnings or structural changes.
There's many ways that you can approach this. Buying an all-in-one solution like Vanguard Australia Shares Index ETF (ASX: VAS) is one option.
This Vanguard ETF tracks the ASX 300 to help diversify your exposure to many ASX shares. However, buying an ETF is not the only option available to you.
Simply buying a few ASX shares across different sectors can achieve your diversification targets. I like Coles Group Ltd (ASX: COL) in the Consumer Staples sector and AGL Energy Ltd (ASX: AGL) in the Energy sector.
By holding several shares across most of the economy, you can help to diversify some company and sector risk. That also means you won't see your portfolio jump by the same amount as you would by buying just 1 ASX share.
Foolish takeaway
What most strategies come down to is building long-term wealth. You may be able to achieve this by buying one ASX share like Commonwealth Bank, but that's a high-risk strategy.
Picking a number of high-quality shares and holding for many decades is the real key to building your financial future.
