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Ask The Experts: The Makings of a Diversified Portfolio

Q. When you say a portfolio should be diversified - what are general percentages and allocations that are comfortable (not high risk) in today's market? -Jane, NY

A. Jane, I love this question, and especially that you're looking at "comfortable" because as we've all found out recently--if you didn't know already--you need to be comfortable with where your money is and how much risk you take on.

Comfort for me means first no more than 15 percent of my investments in any one vehicle, such as an index fund, mutual fund or bond fund. Note I say "fund" - true diversification means not exposing yourself to investing in individual stocks, unless it's your 'play' money--no more than 5 percent of your money should be with an individual stock. Too risky.

Mutual funds, bond funds and index funds are groups of stocks or bonds, either by sector or index or management picks. The fact that they are a group of holdings diversifies your money. If you're investing through a 401(k), for example, many times the choices available to you can be limited. Just make sure that if have to go with a 20 percent allocation split across the options available, you don't go higher than 20 percent. What you don't want is too much exposure to one sector--even in this market where nearly every sector took a nosedive, some sectors didn't do as badly as others. That's how diversification works--like a see-saw, balancing out winners and losers.

Now the only place where the percentages get bigger is your cash holdings. Even in your 20's I wouldn't recommend having 100 percent of your money in the market. You need to protect at least 20 percent of your money with cash-equivalent holdings such as a money market. If you're in your 40's, lean toward at least 30 percent and as you get closer to retirement, more of your money should shifted out of the market, say to 40 percent or more. We'll all suffer losses at some point when we're investing and saving for our long-term goals. Diversification is key to protecting you from taking too much loss.

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Carmen Wong Ulrich is the host of On The Money