by Kent Moore

Created on: June 12, 2009   Last Updated: June 13, 2009

No single investment performs well under all conditions. If you concentrate the majority of your portfolio in one particular investment or class of investments and bad news causes its value to drop unexpectedly, your long-term financial security may be in jeopardy.

You cannot control the factors that cause investment prices to fluctuate, but you can diversify your portfolio to help smooth out the ups and downs. Diversification spreads your assets over a variety of quality securities. By making sure all of your eggs aren't in one basket, your success isn't tired to one company or type of investment.

A well-diversified portfolio includes:

1. Cash and cash equivalents such as money market funds.

2. Fixed-income investments such as corporate bonds, government bonds or bond mutual funds.

3. Stocks that have historically paid out dividends or the mutual funds and segregated funds that own them.

4. Stocks that offer greater chance of capital appreciation.

Another important part of a well-diversified portfolio is weight watching. Not only do you have to make sure that you have investments in each of the above categories, you also need to diversify the investments within each category.

Fixed income: In the fixed income category you should own at least five or six bonds or if you don't have enough money to do that, you should own a bond mutual fund or ETF. You also need to own bonds with short, medium and long-term maturities.

Stocks: When you invest directly in individual stocks the best bet is to make sure no one stock makes up more than 2.5 to five percent of your overall portfolio and that your stocks are spread out across various sectors and countries.

Investing in individual stocks and bonds can get tricky if you don't have a lot of money to invest - diversification doesn't come cheap when investing in stocks and bonds. While diversification can get expensive when investing in stocks and bonds, there is a simple and affordable solution: mutual funds.

Because an individual mutual fund invests in many different securities, it automatically brings a certain degree of diversification to your portfolio. And yet, you can't just purchase any combination of mutual funds and expect good results. Consider this: There are more than 8,000 mutual funds in the financial marketplace, according to the Investment Company Institute, the trade group for the mutual fund industry. About 60 percent of these funds are stock funds, with the rest being "hybrid" or "balanced"

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