Building a diversified stock portfolio can help manage your investment risks and prevent overexposure to a single stock or type of stock. Diversifying your portfolio with different stocks from different economic sectors may help you ride out downturns. Every stock responds somewhat differently to changing economic conditions and world events. By choosing stocks from which gains can offset the near-inevitable losses from other stocks, you may be able to achieve a relatively stable return on your portfolio.

Financial texts often recommend owning 30 to 40 different stocks to build a diversified portfolio. However, building a diversified stock portfolio can be possible with a minimum of about a dozen different stocks. Buying stocks in different economic sectors can be a good diversification tool, because whole sectors are often affected by changing conditions. Stocks are often divided into 11 sectors:

• Consumer staples
• Utilities
• Basic materials
• Capital goods
• Communications
• Consumer services
• Energy
• Finances
• Health care
• Technology
• Transportation

Consumer staples and utilities are called defensive stocks because they represent necessities that are less vulnerable to market downturns. The other nine sectors are cyclical, rising and falling differently in response to market conditions and business cycles. Other slightly different classification systems can help you further diversify your portfolio within a sector.

You can also diversify your portfolio by investing in different types of stocks:

• Capital preservation and capital appreciation

• Growth, value, blue-chip, and income

• Large-, medium-, and small-cap
• Domestic and international
• Low-risk and speculative 

However you decide to build your diversified stock portfolio, you will want to periodically rebalance it to accommodate gains, losses, and market changes. For more information on stock portfolio diversification, see the U.S. Securities and Exchange Commission’s Beginner’s Guide to Asset Allocation, Diversification, and Rebalancing at http://www.sec.gov/investor/pubs/assetallocation.htm.