by Paul Lalley

Created on: May 29, 2008   Last Updated: May 30, 2008

Are you a self-directed investor? Chances are, if you're reading this, you do manage at least some portion of your asset portfolio. Congratulations for taking the lead to a brighter future. No one is going to look after your investments as carefully as you will.

As your own 'Director of Investments', you're familiar with the basics of wealth building - the tried and true axioms of prudent investing. You don't speculate, you don't gamble and you never listen to your brother-in-law's tips. Another good move. There are gamblers and there are investors, and over the long term, the investors have proven to be the winners in the get rich sweepstakes.

One of the fundamental fundamentals of conservative investing is diversification, or, in other words, don't put all of your eggs in one basket. You wouldn't put all of your nest egg into one company would you? Or, one mutual or managed fund? No, of course not. Even the bluest of blue chip companies have their ups and downs. IBM, aka, Big Blue, has sold at over $USD120 a share. In '02, it sold at below $USD60. Had you put all of your eggs in that basket you would have lost a basket full of cash.

Diversification is simply a matter of spreading the risk around. You can do that buying shares of individual companies in different industries - a good drug company, a consumer goods behemoth, heavy manufacturing, media and so on.

Many individual investors have turned to mutual or managed funds, which offer varying degrees of diversification. Broad market funds, Vanguard's Windsor fund or Fidelity's Magellan fund, are good examples of popular, broad market funds.

Balanced mutual funds offer expanded diversification by holding both stocks and bonds, which usually move in opposite directions during market swings. So, when the stocks are doing well, the bond portion of the portfolio will lag and vice-versa.

There are sector funds which narrow diversification to a single sector of the economy. There are exchange-traded funds (ETFs) that are built like mutuals but are traded like stocks.

There are indexed bond funds, junk bond funds, funds that specialize in a particular geographic region, or even a single country. There are CDs, government bonds, asset allocation funds and more. In fact, there's a fund or investment vehicle for just about any wealth-building strategy you could devise.

But what do all of these investment vehicles have in common - the stocks, funds, bonds and such? They're all paper assets. Oh sure, you've diversified through

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