Follow Three Steps to Financial Health

Believe it or not, this is the hardest part of the process. Once it's done, the rest is relatively objective.

The Portfolio Review

There are two parts of the know-your-portfolio review: the "big picture" and "objective support."

The big picture review is another way of playing one of Jim Cramer's Mad Money games, "Are You Diversified?" It's crucial to review your portfolio regularly to make sure it hasn't become too concentrated in any one sector and isn't overexposed to investments that are too closely related in other ways.

Examine all the securities in your portfolio and list the sectors in which they operate. Make sure you have exposure to various business sectors and diverse economic segments. While there's nothing wrong with making an occasional "bet" by being more weighted to a specific sector, individual investors often become far too concentrated because they fall in love with ideas from time to time. Remember, these are stocks, not people.

However, you can be too diversified. Simply put, you can own too many stocks. A highly diversified portfolio can contain only five stocks. My good friend Robert Hagstrom, a longtime Buffettologist and portfolio manager of the Legg Mason Growth Trust (formerly the Legg Mason Focus Trust), has had huge success running a mutual fund with roughly 20 stocks. Although the positions were concentrated, the portfolio was also diversified. In this case, numbers are less important than strategy.