Diversifying your equities portfolio is really necessary especially in today's economic climate as you never know which industry sector will next be affected by the recession.

The concept of diversifying your portfolio is quite simple.  It is pure common sense that you should not put all your eggs in one basket so to speak. If you own stocks in an airline, then don't purchase more stocks with another airline. Look at a different industry altogether. Give some thoughts like this, if there's suddenly a large increase in operational cost such as fuel for planes then this will affect all of the airlines. If you own stocks in more than one airline this will affect the price of all your stocks portfolio. 

It makes much more sense to spread your investment dollars around different industries. Others will argue that if sticking with my example, the airlines suddenly start to see a large increase in passengers you'll feel the surge in stock price as profits will rise.  This is of course true but in my opinion it's not worth the risk. It's much more of an insurance policy to look elsewhere to diversify your stock portfolio.

So, how much should you diversify? 

This is entirely up to you and will probably relate to how much knowledge you have in a particular area and how much cash you're willing to throw around buying stocks and shares. You want to keep your portfolio manageable so it might make sense to keep it to 5 industries or how ever many you think you can spend the necessary time on. 

Warren Buffett, the greatest investor of all time, has a slightly insular way of diversifying and lets face it who can argue with his success? He's tended to invest heavily in a small amount of companies so his portfolio is not as diversified as most. He's always stated that by trading stocks frequently in an attempt to diversify simply gives the stock broker more money and will reduce your profits because you have to keep paying for trading fees. Warren Buffett has always stated that it's better to invest more in a stock you already own that spread your money around so thinly in the hope that you'll hit all the bases.

This brings me on to index funds. Warren Buffett is a great advocate of using index funds and believes that they are suitable for the majority of investors. This takes the skill out of investing in stocks by simply buying the whole market. For beginners to the stock market this can be a sure fire way of getting long term returns. No research is required you simply buy the same amount of stocks each month across the market and the handling fees for brokers are exceptionally low. Index funds aren't as exciting as buying stocks by yourself. You won't find anyone hanging around parties bragging about an index fund they own but no one can question the long term profits by sticking with this method.

In summary, index funds such as ETF may be the best way for the majority of us to diversify out portfolios and still make a decent long term profit by investing in the stock market.

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