When you talk to any astute financial advisor about risk in the stock market, the first piece of advice you're likely to hear is, "You can reduce your risk with proper diversification." Fair enough. But what does that mean?

Diversification is a strategy for reducing risk by spreading your money across different investments. It's a fancy way of saying, "Don't have all your eggs in one basket." For most people, that advice is generally true. Having a little bit in this investment and a little bit in that investment means never having to say, "I lost all my money!" But how do you go about divvying up your money and distributing it among different investments? The easiest way to understand proper diversification may be to look at what you should not do:

1. Don't put all your money in just one stock. Sure, if you choose wisely and select a hot stock, you may make a bundle, but the odds are tremendously against you. Unless you're a real expert on that particular company, it behooves you to have only a small portion of your money in any one stock. As a general rule, the money you tie up in a single stock should be money you can do without.

2. Don't put all your money in one industry. There are people who own several stocks, but the stocks are all in the same industry. Again, if you're an expert in that particular industry, it could work out. But just understand that you're not properly diversified. If a problem hits an entire industry, you'll get hurt.

3. Don't put all your money in just one type of investment. Stocks may be a great investment, but you should have money elsewhere. Bonds, mutual funds, bank accounts, treasury securities, real estate, and precious metals are perennial alternatives to complement your stock portfolio.

4. Don't put any more than 25 percent of your investment money directly into stocks. Follow the advice above and look at spreading your investments over several growth routes.

5. Invest in four or five different stocks that are in different industries. Which industries? Choose industries that offer products and services that have shown strong, growing demand. To make this decision, use your common sense. Think about the industries that people will need no matter what happens in the general economy, such as food, energy, and other consumer necessities.


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