The Right Way to Diversify

Many Choices

Diversification possibilities and permutations are virtually endless when considering the number of investment vehicles available, including the numerous geographic-index ETFs and mutual funds (based on country or region) and the impact of any one investor's personal style and risk tolerance.

A solid "middle of the road" U.S. diversification plan is to allocate one-third of your portfolio to three primary indices, such as the Nasdaq 100, the Russell 2000 and the S&P 500. From there, feel free to experiment according to your own tastes and preferences.

In all, you should have no more than five funds in your portfolio. And yes, there is such a thing as too much diversification. Because trends typically last a year or more, you should be able to choose your funds based on the trend line you are following.

And always resist the temptation to outsmart diversification principles by heavily chasing last year's superstar. They are unlikely to crank out the hits year after year.

As far as which international funds to select, a basic guideline is that single-country and emerging-markets funds are notoriously volatile. Individual countries are more susceptible to falling out of sync with world markets than are regional funds -- even emerging-market funds.

Unless you have some insight into which country's stock market is going to do well, you are better off sticking with broader regional plays, such as a European, Pacific region or Latin American fund.