3 tips to practice smart diversification: Don't get stuck in an investing rut

Sticking to what you know can be comforting. We all have our routines and most of the time they are not detrimental to our future, but when it comes to your portfolio, being stuck in an old routine of investing in the same assets over and over again can be extremely damaging.

Here are three tips to get you started on the road to smart diversification and a well-balanced portfolio.

Find your tolerance level

The first thing to think about when diversifying your portfolio is determining your tolerance for risk. Ask yourself about how much volatility you can endure. If you push too far outside your zone and those investments plummet, your emotions will take over. When this happens, people tend to pull out as fast as possible, resulting in monetary losses. If you pinpoint how tolerant you are of your money bouncing around on a daily basis, you can be tremendously successful in the long run.

Know what your investment objectives are, whether you're using money for building a college fund or using disposable dollars to earn extra income. Be honest with yourself and you'll be able to build a portfolio that you can believe in, even when the markets themselves are making you nervous.

Identify the missing pieces

Take a hard look at your portfolio and identify sectors that are weak or missing. For instance, if you only invest in the U.S. market, you'll want to investigate other market options. Nothing is ever completely safe or guaranteed - it's up to you to have that safety net in place if markets go sideways. With more than 10,000 publicly traded companies available to choose from, consider a mix of the following areas: U.S. markets, developed international markets (countries like Germany, the U.K., Japan or Australia), emerging market companies (countries like Brazil, India or China).

Also, your portfolio needs to consist of more than individual stocks. There should be a careful balance of stocks, bonds, real estate, and money market accounts. Investment grade rated bonds are often used to temper the volatility of a portfolio. If the market itself goes into a tizzy and causes a headache for your portfolio, bonds are the pain reliever. They help to keep an even keel for overall performance.

Watch out for hype

Company names and specific brands get plenty of media attention. The key here is to determine the signals in the noise and not put all of your eggs in one investment basket. Sure, company XYZ may have had a great year and you can't turn around without hearing more and more about them. This often leads to expectations far outpacing reality. Instead, take a hard look at realistic number for the company's future. Determine where are they going from here and if they are a one-hit-wonder or have legs to stand on. It takes careful research and plenty of homework to come up with the answers to these questions.

Diversification may sound extremely technical and confusing, which is why it's important to have an overall plan. Once you know what the end goal is, you can focus on the steps needed to make that goal a reality. Have people you can use as a sounding board to help you think through all of your ideas. Do the research and then invest in your success.

• Jack Meyer is a wealth adviser and owner of Meyer Wealth Advisors in Aurora. He began his career in financial consulting after finishing college in 1976. He holds the designations of Chartered Life Underwriter, Chartered Financial Consultant and has a Certification in Long-Term Care.