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funds (which invest in a mix of stocks and bonds), taxable bond funds, municipal bond funds, and money market funds. With such a large number of funds available, and with a finite amount of stocks, bonds and other securities in which these funds can invest, it's easy to see that there is going to be considerable duplication among many of these mutual funds - and duplication is the opposite of diversification. Consequently, when you invest in mutual funds, you can't just adopt a philosophy that can be boiled down to "the more, the merrier."

Ultimately, your first step in diversifying a mutual fund portfolio is to identify your individual risk tolerance and investment objectives. Are you a conservative, moderate or aggressive investor? Do you need growth, income or a combination of both? Once you've answered these questions, you can then begin selecting the right mix of mutual funds to help you achieve your financial goals.

The final element of maintaining a well-diversified portfolio is re-balancing. As the market runs its course, the value of certain sections of your portfolio will grow faster than others and this will mean that your portfolio won't be balanced. Check your portfolio quarterly and make sure that you re-balanced.

While diversification does not guarantee a profit or protection against loss, it does protect you from having all of your eggs in one basket. Diversification will help mitigate the impact of a significant blow to one sector or country's economy and is an essential step to keeping your retirement savings as safe as possible.

Learn more about this author, Kent Moore.
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