Diversifying your investments has two benefits: you can reduce the risk of losing money while also doing the opposite and increasing the chances for greater gains.

The process of diversifying your portfolio can be as complicated as you wish to make it or relatively easy. Many authors and magazines publish articles regularly about allocating (another word for diversification) your money in your portfolio. Typically these recommendations are based on your age with the presumption you’re income will follow a cycle that leaves you with nothing in your golden years. They also presume you will want to invest in bonds, stocks, utilities and perhaps foreign stocks.

Personally I believe these concepts are outdated and based on the concept of one shoe fits all. And while I know Florsheim makes many shoes in 8-1/2 B, none of my friends or anyone I’ve ever met wears my same size.

When you consider your portfolio it is important to first gage your personality and your goals. Do you want to play it super safe: most of the time or sometimes. Do you want to grow your bank account quickly or are you willing to wait 10 or 20 years?

When you are honest with yourself about your personality, your “risk factor” and your “realistic” goals, not just your dreams; then you can create your diversification chart.

But first there is also the time factor, your time factor. How much time are you willing to spend making money, growing your investment accounts? I know some folks who only want to look at their investments or only have the time to do so about once a month, others are willing to spend an hour or two a week and others pour over the markets every day.

For those with little time, less than a few hours a month, mutual funds, some ETFs and even some stocks would fit the bill. For those willing to spend every day managing their investments mutual funds probably will not fit the bill.

Generally speaking, when I consider diversification I consider certain key groups of investments, each of which can be broken down further, and there are more groups, but these are my key areas for diversifying my portfolio:

1. Stocks – small companies 
2. Stocks – large companies 
3. Bonds 
4. Foreign 
5. Utilities or Dividend payers 
6. Sectors 
7. Asset

Any of these can be selected via mutual funds, ETFs or individual stocks. Again, these groups can be broken down further, for example:

a. Bonds – short term 
b. Bonds – long term 
c. Emerging markets 
d. Domestic 
e. Health 
f. Transportation

The question is how do you mix and match to diversify your money to meet your goals with these groups? This is our next topic.