Many newcomers to share investing spend a couple of agonising months tossing up which stocks to buy, and after taking the plunge into their first share purchase begin snatching up stocks at an increasing rate. Stock picking is where the action is, and the consumer in us is compelled to buy up big and fast. But we easily forget that the real aim here is to construct a share portfolio. And whether we like it or not, random stock picking won't give you a well-constructed share portfolio.

There’s a more important reason, however, for why you must spend time constructing a solid and dependendable portfolio. Too many investors nurse war wounds of past sharemarket corrections that have trampled on their wealth and future lifestyle. Your portfolio, therefore, should be built to withstand the ebbs and flows of the market. Inevitably you will lose some money along the way, but like a little boat out at sea you don’t want to get capsized in rough conditions.

Financial planners harp on about diversification like scolding parents. "Don’t put all your eggs in one basket," is the adviser mantra. While the repetition is often enough to make us act in the opposite manner, what the advisers are stressing is undoubtedly the secret to not just making money but also staying in the game.

Diversification means not holding Westpac, National Australia Bank, Commonwealth Bank and ANZ in a portfolio, unless of course, your portfolio is so large that the financials bent doesn’t leave you too exposed. It also means not buying just resources stocks or speculative miners, too many cyclical stocks in industries that tend to move in sync, or defensive stocks during times of prosperity and growth. Diversification is the secret armour of the seasoned investor whose fortune is amassed during good and bad times.

The trouble with seeking diversification in a portfolio is that you need a lot of money to do it. If you have $5000 to spend, you simply don’t have enough to construct a diversified portfolio. So what should you do?

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