Diversification means that you haven’t put all your eggs in one basket. If you are investing in stocks and want to be diversified, you would invest in companies that are a part of several different industries. This would help reduce the risk in your portfolio because if one stock goes down, there are still others that might at least stay the same or go up.

It’s really not that difficult to understand why you should diversify. The problem comes when you actually need to start diversifying. A lot of people think it means buying 40 different stocks.

Is buying stock from 40 different companies the proper way to be diversified? No? Than how many do you need to really be diversified? Definitely not 40. You could never do the proper research to keep up with 40 different companies and still have a life besides that.

Before you buy stock, you have many things you need to get done first. Research is the first. You need to go through their annual reports and financial statements, you need to follow what they are doing, and you must really know and understand the company and it’s purpose. Don’t ever invest in a company you can’t understand.

If you invest in 40 companies, or even just 20, you won’t be able to put in the right amount of time for each stock. It may take you up to 1 hour per week to keep up with each stock. If you feel this is too much time, you might not be well committed to investing into stocks directly and should invest in a mutual fund or index fund.

If you are interested, in order to make investing worth your time and still have a diversified portfolio, you should invest in 5 to 10 stocks. If you are investing a smaller amount, 5 stocks should be enough.

You don’t need to be invested in tons of different stocks to really be well diversified. This is a common misconception. In fact, you shouldn’t be invested in too many. You need to be able to keep an eye on your investments and keep up with them. Stay diversified with a few stocks in different industries and you should be good.