What an Investor Really Needs: Diversification

Simply put, the number of securities you own is less important than how diverse those securities are. Diversification is a technique that involves investing in several different asset classes and a variety of securities within each asset class to help reduce the impact of volatility in your portfolio and assist you in managing risk.

You should look for two things when you're thinking about your diversification: (1) A heavy emphasis on a single security type or industry, such as growth stocks or energy names, and (2) any holes in your portfolio. More than one large-growth fund or energy stock, for example, won't add much to a portfolio.

Additionally, the odds are pretty good that if a portfolio holds multiple investments that are behaving the same way, or you're considering investments that do the same thing, one investment is better than the others. You may want to focus your money on the best choices.

And you shouldn't forget that your portfolio can have overlap even if you own just a small number of securities. Conversely, even if you own a lot of investments, you could still have gaps in your portfolio.

The bottom line: You may not want to obsess over the number of securities you own; instead, you may be better off concentrating on their diversity.

You can use Scottrade Portfolio Review Tool to highlight any overlap in your current portfolio and expose any gaps in your diversification. And, as you build a new portfolio or alter your existing portfolio, you can see how your choices align with your investment strategy and whether or not your new portfolio will help you reach the level of diversification you're aiming for.

Read Next: Avoiding Overlap When Building a Portfolio

Keep in mind that while diversification may help spread risk it does not assure a profit or protect against loss in a down market.

The analytical tools described in this article are for information purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision.