Diversification is an important concept in managing your portfolio. Remember that this information goes not only for your long-term investments portfolio but for your trading portfolio as well. Diversification means that you attempt to limit the risk to your overall portfolio by spreading your capital over a variety of investments and assets with different levels of risk. Doing this properly should maintain a smooth level of growth.

There are a variety of different types of investments with different levels of risk that are available. Many people hold a small amount of their portfolio in cash. Having some cash on hand is always important for if some unanticipated need arises and to limit volatility in your account. It is the lowest risk position you are going to have but, of course, also the one with the lowest potential returns.

So now you can establish your base. Put most of your portfolio into low to medium risk positions. For the investor, this might include bonds, a little gold, mutual funds and/or exchange traded funds, depending on what you feel most comfortable with. Consider weighting your investments using Sector Rotation techniques (which we will discuss more in a future article). Basically, sector rotation is the concept of weighting your investments according to the cycles of the economy. For the trader, you'll want to use a good system that generates picks for the ETFs or large-cap stocks, both of which have less volatility.

Then you get into your high risk/reward plays. For investors, this is a small amount of your portfolio that you reserve as speculative money. Do you have some small Biotech stock in mind that you think might be a big winner in the next few months? Put 5% of your portfolio into that and take a chance. A couple speculative positions could add some nice profits to your portfolio. For traders, this is where you get into your swing trades or high-risk options trades that could provide some very nice returns for your portfolio.

Remember to not put all your eggs in one basket. Diversify your investments and you will provide yourself with steady gains in all market conditions. You'll be able to sleep at night knowing that your money is safely protected across a range of different assets.