Without getting bogged down in the swamp of investment lingo, diversifying one's portfolio is virtually a requirement in today's market. There is a segment of the financial world that argue one should find a stock or industry that works and stick with it. On the surface and to the short-sighted, this idea seems to makes sense. Sticking with a winner will bring you money, right? In some instances, I would agree, but not when it comes to investing in stocks.  After taking even a cursory glance into the history of the stock market, the eyes of any but the most foolish of investors will be opened.

Before I continue however, I want to bring your attention away from individual stocks and think about mutual funds instead.  Mutual funds simply take your money and invest them in a group of different businesses instead of lumping it all into one.  A good mutual fund invests in a number of different companies from different industries, such as finance, technology, or retail. This range of stocks gives the average investor a chance to purchase shares of a company that they may not have been able to on their own, while providing diversification. In this way, for example, if the retail sector suffers some sort of setback, the finance and technology areas should buoy your investment. For example, say you invested heavily in sub-prime lenders a couple of years ago, before the big crash. With the huge dividends they were paying out, lots of folks were making money. Once the housing bubble hit, those stocks dropped like stones, with several of those companies going out of business entirely. During the same time all this was going on, the oil industry was riding a nice high, remember? Now you're thinking you should have just put all your money into oil instead of mortgage loans. Not so fast, oil is a cyclical investment, meaning during certain seasons it does better than others. In addition, there are storms at sea, oil speculators, spills, even pirates! Each one of these things can have an impact on the market. The point is, spreading out your assets isn't so much to ensure you make the most money you can, but to help protect you from losing too much of it in a downturn.

Yes, it's true that since its inception the stock market has generally gone up, and there are a lot of really rich people out there to prove it. This doesn't mean that you can still invest in one stock and simply ride out the hard times. There were plenty of investors who tried that when Pan Am went under. Or worse yet, think back to the Enron disaster. An industry giant that was a complete illusion. When it collapsed, people lost millions. As a matter of fact, there are hundreds of businesses that went public then went under, taking their investors with them. Some of them went under because of fraud, some for poor business practices and others withered out simply because the market couldn’t support them. The truth of it is, the hows and whys don’t really matter. The important thing is that some businesses will fail, no matter what they look like on paper.

Unfortunately, if you have limited finances, spreading your assets may not work for you. If you only have a few hundred dollars, it simply doesn’t make much of sense to buy three shares of eight different companies. In a case like this, putting all your eggs in one basket is probably a better idea. I wouldn't make that basket the stock market, however. In this instance I would strongly recommend a good mutual fund with a solid history.

Another problem with diversifying is determining what industries to invest in. Should they be similar, symbiotic, or polar opposites? I won’t tell you where to put your hard earned money. I will tell you to do your research, though. Snoop around the financial websites and learn as much as you can. Don't ask your pal or your neighbor unless they happen to be rich. If your neighbor was that good with his money, he probably wouldn't be living next to you. No offense, but if you were rich you wouldn't be reading this, would you? With that in mind, seek out the advice of people who know how to use money to make more of it.