The season of baskets filled with colored eggs and candy has recently passed. But investors on the bunny trail to wealth cannot get away from the darn things – baskets, that is.

Exchange-traded funds (ETFs), for example, are frequently described as being invested in "baskets" of stocks. ETFs are a cross between stocks and mutual funds, and many of them hold a fixed set of securities, thus conjuring the image of a fixed basket of companies. Shares in ETFs can be traded like stocks, though. (Learn whether you might want to invest in them.)

Meanwhile, we could think of our own portfolios as baskets: receptacles that we fill with investments. Heck, even our heads are basket-like, filled with nuggets of investing information and skills.

Then there's the diversification basket -- the one you always hear about proverbially: "Don't put all your eggs in one basket!"

Eggs and baskets
It sometimes seems like unnecessary advice: I mean, who would put all their financial eggs in one basket? But now and then we're reminded that some people do. Think of many of Bernie Madoff's clients, for example. Also, plenty of employees of Enron, WorldCom, and Lehman Brothers lost fortunes due to their share holdings.

It doesn't have to be quite that bleak, either. Anyone who invested all of her money in one of the following stocks three or five years ago isn't penniless, but is probably regretting it:


3-Year Avg. Annual Return

5-Year Avg. Annual Return

Macy's (NYSE:M)



Weyerhaeuser (NYSE:WY)



Sara Lee (NYSE:SLE)



Krispy Kreme (NYSE:KKD)












Office Depot (NYSE:ODP)



Gannett (NYSE:GCI)



S&P 500



Data: Yahoo! Finance.

That's why diversification is so important. Some of the companies above may do well in the long run, but in the interim, in concentrated doses, they can do a lot of harm to portfolios.

Many of us don't sufficiently understand or respect that. According to the Federal Reserve's 2007 Survey of Consumer Finances, more than a third of the families that held stock directly in 2007 were invested in just one stock. Ay yi yi. They've taken on a lot of risk.

It can really pay to get some investing basics under your belt. That way, you won't end up with an underdiversified portfolio at risk of catastrophic hits when things go wrong. (Check out the Fool's "10 Essential Money Lessons," an ongoing crash course in financial literacy.)

For help avoiding big financial mistakes, take a free test-drive of The Motley Fool's Rule Your Retirement service. The experts there offer advice on proper portfolio diversification and avoiding tax pitfalls; don't forget to check out all current and past stock and fund recommendations.

Frustrated with your 401(k)? Even if your employer's plan isn't the greatest, you don't have to give up your dreams of a happy retirement. Get the tips you need to turn your retirement savings around in our special report, "How To Make The Most of Your 401(k)" -- just click here for instant free access.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.