Diversification is an important concept in managing your portfolio. Diversification means that you attempt to limit the risk to your overall portfolio by spreading your capital over a variety of investments and assets with different levels of risk. Doing this properly should maintain a smooth level of growth. Remember that this information goes not only for your long-term investment portfolio but for your trading portfolio as well.

There are a variety of different types of investments with different levels of risk that are available. Many people hold a small amount of their portfolio in cash. Having some cash on hand is always important for unanticipated needs or opportunities that my arise and to limit volatility in your account. Holding cash is the lowest risk and also, most likely, the lowest return but you can still make it work for you. EmigrantDirect has a savings account that offers a 5.05% APY and anyone with a PayPal account can sign up for their money market fund which is currently earning 5.03% a year.

Once you have your cash position established you can work on your real assets. Put most of your portfolio into low to medium risk positions. For the investor, this might include bonds, a little gold, mutual funds and/or exchange traded funds, depending on what you feel most comfortable with. Consider weighting your investments using Sector Rotation techniques. For the trader, you'll want to use a good system that does not involve too much risk, perhaps a system that trades ETFs or large-cap stocks.

Then you get into your high risk/reward plays. For investors, this is a small amount of your portfolio that you reserve as speculative money. Do you have some small Biotech stock in mind that you think might be a big winner in the next few months? Put a small amount of your portfolio into that and take a chance. A couple speculative positions could add some nice profits to your portfolio. For traders, this is where you get into your swing trades or high-risk options trades that could provide some very nice returns for your portfolio.

Remember to not put all your eggs in one basket. Diversify your investments and you will provide yourself with steady gains in all market conditions. Youââ,¬â"¢ll be able to sleep at night knowing that your money is safely protected across a range of different assets.

Price Headley is the founder and chief analyst of BigTrends.com.