SMART INVESTOR: Here's One Way To Tell A Rookie Investor From The Real Deal

Here's one thing you'll never catch a smart investor saying:

"My investments are well-diversified because I own a mutual fund that tracks the S&P 500."

The misconception here is that by investing in an assorted pile of stocks (even in the form of a mutual fund) makes your portfolio diversified and, thus, minimizes risk.

Wrong.

It takes a well-balanced variety of investment vehicles to get a truly diversified portfolio. That means mixing up those stocks with assets like bonds, treasuries, exchange traded funds, money market funds, international stock mutual funds, real estate and, yes, some cash.

The bottom line:

Settling on which types of assets you're willing to invest in is the simple part. The question you (and hopefully a helpful advisor) must answer first and foremost –– which will dictate how much you decide to invest in which vehicles over time –– is your tolerance for risk.