The Winning Recipe for Your Portfolio

All it takes is one superstar stock to make you rich. To have the best chance of finding that millionaire-maker, you have to assemble a diversified portfolio that includes only the best of the best stocks available. But even though everyone talks about diversification, there's one way to build a great portfolio that will help you achieve all your financial dreams.

Are you diversified?
Diversification means different things to different investors. For those who are just starting out, a simple index mutual fund may provide as much diversification as they need in order to get acquainted with the world of investing. In fact, many investors put together portfolios with many different mutual funds that collectively give them exposure to thousands of investments spanning the entire universe of available securities.

Other investors look to diversified portfolios in the context of asset allocation. Creating the right mix of stocks, bonds, cash, and alternative investments can give you the exact balance of profit potential and protection from bad markets that makes you comfortable.

Nowadays, it's easy to put together a diversified portfolio. With the help of hundreds of exchange-traded funds (ETFs) that are tailor-made for whatever investing objective you have, you don't need a ton of money to get broad exposure to whatever type of investment strikes your fancy.

But just because it's easy to get diversified doesn't mean that you should go overboard on it. In fact, many investors who relied on a diversified portfolio of stocks to save them during the bear market were sorely disappointed.

Is diversification dead?
From late 2007 to early 2009, stocks across the board lost a huge amount of their value. Overall, the S&P 500 lost well over half its value, stunning many investors who had never seen such a sudden and huge decline before.

Perhaps more painful, though, was the fact that there was little refuge from the storm of the financial crisis. A few stocks, such as Wal-Mart (NYSE:WMT) and McDonald's (NYSE:MCD), eked out gains in 2008. But for the most part, it didn't matter much whether you invested in blue-chip megacap stocks or tiny company stocks, well-known domestic companies or obscure businesses from emerging markets around the world -- you lost money anyway.

That's made many people question whether diversification is really everything it's cracked up to be. The answer, though, is that it depends on how you choose to diversify your investments.

The right way to diversify
Last year proved that you can't just toss a bunch of different stocks together and expect things to work out great. If you pick your investments badly, it doesn't matter how many you have -- you're still going to lose.

Instead, the way to put together a winning portfolio involves taking the best ideas from great investors and mixing them into an amazing combination. For instance, consider some of these proven investing methods:

• Value investing. Seeking out truly great companies at attractive prices helps boost your long-term returns and gives you a margin of safety against market downturns.
  
  
• Dividend investing. Stocks that pay dividends don't just give you valuable income to spend or reinvest. They've also done better than their non-dividend-paying counterparts historically.
  
  
• High-growth investing. Some innovative companies break molds and create great business opportunities. Investors who discover these companies early on can earn huge profits.
  
  
• Small-cap investing. New businesses often run under Wall Street's radar for years before they're discovered by mainstream investors. Find those stocks first, and you can reap big rewards once others finally catch on.
  
  
• International investing. Keeping your money close to home is easy, but you can miss out on some of the best investing opportunities in the world. Adding international stocks can diversify your portfolio and give you some protection from U.S. economic problems.

Even over the past two years, when the markets were plummeting, you could find some exceptional stocks using each of these methods that actually rose in value:

Source: Yahoo! Finance.

Now don't get the wrong idea: These stocks were extraordinary performers. Plenty of other stocks that could stand as good examples of each of these investing methods lost money during the bear market.

But these stocks show that even in bad markets, you can make money with the best stocks. And more importantly, when you use multiple strategies to find good stocks, you increase your chances of unearthing the investments that will help you outperform the market.

Making it easy
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