Diversifying your portfolio is kind of like blending coffee beans to create the best cup of coffee that you enjoy. Your cup, just like your portfolio, will be unique to you. While it sounds simple enough, there are a few pitfalls that apply whether you are investing in stocks, ETFs or mutual funds.

You may, for example, want to develop a portfolio based on energy, consumer goods, South America and health. Why, because you like these areas or perhaps you feel more comfortable with these areas (or whatever areas you choose).

Some people like Pepsi and won't touch a Coke no matter what, and vice versa. Or maybe their favorite and only soft drink is Dr. Pepper. I happen to be a Pepsi person, but I also enjoy a nice frothy, mellow root beer or cream soda from time to time. The point is that I blend my tastes to more than what is my one preferable choice. The same applies to diversifying or blending your portfolio.

A portfolio that is focused strictly on your most comfortable likes may mean you will miss out on opportunities or suffer unnecessarily during market declines. But if you blend just a bit of other areas into your portfolio you may actually strengthen it while not giving up your preferences. If we take our original four areas of investment and blend in a few other areas that compliment them you can create more diversification, more opportunities and lessen potential risk. In our example, you could add sectors as a segment or perhaps domestic manufacturing.

In all cases you can decide what elements will be part of a segment group. Consumer goods can include companies that make things where the ultimate buyer is a general consumer or is an actual retailer. In other words you could include companies that make pills for high blood pressure because their ultimate customer is an individual and you could include retailers who sell snack foods, and yes, the snack food company. You can do this with individual stocks or with ETFs or funds that focus on any of the groups that interest you.

But by blending some peripheral groups into your portfolio choices you diversify and give yourself the opportunity to reallocate your money when one part of the economy is surging ahead of others. A program that analyzes based on some type of relative strength will help steer you towards these opportunities.

An important element to blending your portfolio is that your portfolio represents you. This is a good thing but it is derived from your basic set of emotions, your likes and dislikes. If you had a bad encounter with a bank eight years ago you may not want banking in your portfolio; understandably so. But while you cannot eliminate emotions from investing you can control them so that your diversification goals and investment choices are also based on sound analytics. When you combine the two, your emotional personality and analytics, your likelihood of success increases dramatically.

So don't be afraid to look at other segments of the economy or to admit there are parts you will never invest in. Moving a little out of your comfort zone, although not too far, may give you opportunities you would not have otherwise considered.

Author Raymond Dominick is the designer of Dynamic Investor Pro investment software for stocks, ETFs and mutual funds. He has been investing in the markets since his teenage years. An experienced business manager and journalist, he has been a registered investment advisor representative, also a professional photographer who loves escaping to the wonders of Glacier National Park in Montana.
 View his software at: http://www.dynamicinvestorpro.com