by Jack Thornton

Created on: September 13, 2007

Picture yourself back in 1997 with a few thousand dollars in hand that you want to put to work in the stock market. You pick a few tech stocks and watch them zoom higher and higher for the next few years until finally they all come crashing down, leaving you with less money than you started with. Quite a ride. I bet that isn't what you want to have happen with your portfolio going forward.

Yet, you know you have to be invested in something. Stashing $20s in your mattress won't get you very far. So how should you handle your money? In a word, Diversification.

Diversification is simply spreading your money out among different investments to help limit volatility and risk. Volatility is that wild ride quick changes in value up and down. The more an investment's value changes, the more volatile it is. Risk measures the likelihood of your investment losing value.

By choosing a broad array of investments, it is possible to decrease the volatility of your portfolio and keep risk down while still allowing for reasonable growth. Note, it keeps risk down, but it does not eliminate risk. There is no such thing as a risk free investment even cash in your mattress has risks.

So, you've decided that diversification is a good idea. How do you diversify? There are really two ways to diversify, and you want to use both of them. The first way is a diversity of investment type. The second is a diversity of selections within each type.

By a diversity of investment types it is suggested that you do not have all of your investments solely in stocks. Or solely in bonds. Or solely in real estate. Or solely in impressionist paintings. If you only have one type of investment you could lose everything due to a single cause. For example, if all your money is in apartment building in Florida, a single hurricane could wipe you out, literally.

Likewise, within your stocks, you do not want to have all of your money in a single company. If that company goes bankrupt, you will lose all your stock money at once. If you instead have your money split evenly between 10 different stocks, the most you can lose from a single company going bankrupt is 10% of your investment.
Most of us do not want to commit the time to thoroughly invest a large number of companies, their associated stocks, bonds and other investments, plus look into real estate and collectible investments.

Limiting our discussion just to the stock market, there are multiple ways to be diverse. The first is to spend time researching a number

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