Everyone tells you to diversify, but what does that actually mean? Here's how to build a portfolio that actually reduces risk without diluting returns.

"Don't put all your eggs in one basket" is one of the oldest investing maxims. But diversification is more nuanced than just owning a bunch of different stocks. Owning 50 tech stocks isn't really diversified. Owning stocks across different industries and sectors but all in the same country isn't fully diversified either.

True diversification means owning assets that don't move in lockstep. When tech stocks are down, maybe value stocks are up. When US markets are struggling, maybe international markets are doing fine. When stocks are down, maybe bonds are up. That's the theory, anyway.

The reality is more complicated. In crisis moments, correlations tend to converge - everything goes down together. But over longer periods, proper diversification does reduce volatility and improve risk-adjusted returns.

Here's what actually works: Diversify across asset classes (stocks, bonds, maybe real estate or commodities), across geographies (US, developed international, emerging markets), across market capitalizations (large cap, mid cap, small cap), and across sectors. But you don't need 100 stocks. Studies show that most diversification benefits are captured with 15-30 well-chosen positions.

The key is avoiding false diversification. Don't own five different S&P 500 index funds thinking you're diversified - you're not. Don't own a bunch of stocks in the same industry and call it diversified. Think about what could go wrong and make sure not everything in your portfolio would be affected the same way.

For most investors, a good starting point is broad market index funds (US total market, international developed markets, maybe some emerging markets), plus some individual stocks you've researched in companies you believe in. Keep individual stocks to a reasonable percentage of your portfolio - maybe 20-30% if you're actively managing, more if you're comfortable with higher risk.

Rebalancing matters too. As some positions outperform, they'll become a larger percentage of your portfolio. Rebalancing back to your target allocation forces you to sell high and buy low, which is easier said than done but crucial for long-term success.

Don't overthink it. The perfect portfolio doesn't exist. Start with broad diversification, adjust as you learn, and stick with a plan. Consistency and discipline matter more than getting every allocation exactly right.