Don’t have all your eggs in one investment basket

Q. Dear Rick: I’ve heard you talk often about the importance of diversification in a person’s investment portfolio. Could you explain why it’s so important, and how to attain it? Jane — Essex

A. Jane — Someone who has “diversified” their portfolio will have their investments spread over a wide enough area of investments that no matter what happens, at least a portion of their portfolio will always be invested in a section of the market that is doing well at the time.

In a perfect world, you’d want to keep your entire portfolio invested in the markets that are doing well and then switch them all over to the next hot area whenever the market changes. But the fact is no one has a crystal ball that allows you to predict these kinds of changes before the market shifts.

Because I suggest people invest the bulk of their portfolio in mutual funds, when it comes to diversifying your investments, I recommend having a portfolio that includes between five and ten good mutual funds that cut across the spectrum of large, Mid- and Small-Cap Growth, Blend and Value funds.

When you’re younger, a slightly larger portion of your portfolio — perhaps 60 percent — can be in growth funds. As you move toward retirement, a larger portion can be moved into value funds, which are usually less risky. About 15 to 20 percent of your portfolio should also be in foreign or global funds in addition to 5 to 10 percent in balanced funds — which are widely considered the least risky.

Because it’s so hard to know exactly when to buy an individual stock and, more importantly, when to sell, I’d suggest that none of your portfolio be invested in an individual stock unless you have a very large amount of cash — $500,000 at the very least — to invest.

The one exception to that rule: It’s OK to keep an individual stock from your company that you receive as part of the “match” your employer may give you as part of your 401(k) or 403(b) plan — but even then, keep the amount of company stock in your portfolio to a maximum of 10 percent. If you would like any money or financial related question answered, please email it to Rick Shaffer at: AskRick@ BostonHerald.com.