Most people have heard about the investment principle called asset allocation. This principle tells us not to put all of our eggs in one basket. What this really means is we don't want to invest too much of our money in any one type of investment such as growth stock or technology or even just a few investments.

Another important principle to know if you're looking to improve portfolio returns is diversification. Diversification is an important factor in building and managing a long-term investment portfolio. However, for most individuals the more difficult question is "what does that really mean in terms of how I manage my own investments"?

Here are some important principles to keep in mind in building, reviewing and managing your investment portfolio.

• All investments involve some level of risk. Make sure you understand what the risk in your portfolio really represents. It is much easier to accept a 5% loss than it is to accept a $50,000 loss. Think in terms of dollars and not just percentages.
  
• You can literally reduce your risk and increase your return if you combine different types of investments in your portfolio like stocks and bonds and international. This is easy to forget when one type of investment is doing really well.
  
• Adding bond investments to your portfolio may actually help increase your return in very volatile markets and it can certainly reduce the risk.
  
• Always maintain cash reserves in a money market or cash equivalents so you dont have to sell something at the worst possible time.
  
• Don't be afraid to take profits. You can never lose money by taking profits. Even if you do have to pay taxes, profits are still a good thing.

In the current volatile environment, how can you take specific steps to improve the return on your investment portfolio and still try to control the risk? Here are some action steps to help you build a portfolio with potential for increased returns.

• Review your current investments and make sure you have no more than 30% in any one type of investment such as large growth stock, large value stock, small cap growth stock, international stock, technology stock, or any other specific type of investment. If one investment type begins to take over your portfolio, it can significantly increase your risk level. Sometimes less is definitely better than more.
• Review each specific individual investment and pay special attention to those that make up 10% or more of your portfolio. If one investment is this high a percentage or higher it can really increase the volatility and risk of your overall portfolio. It can also potentially reduce your return significantly.
• If you defined your overall percentage targets per investment type for your overall asset allocation a year or two ago, compare the targets to where you are now. If you dont have targets, now is a really good time to develop them.
• The process of defining objectives and building a diversified portfolio can increase your returns over time and decrease your volatility and risk. Be very specific about what you want to include in building your portfolio.
• Allocate percentages to money market type investments, bonds, large cap stock (stock funds), mid cap stock (stock funds), small cap stock (stock funds), and international stock (stock funds) as a starting point. This type of portfolio is a broadly diversified investment mix.
• Select investments based on how they fit your overall portfolio and not just based on the hot investments or the stock of the day.
• Now is a good time to make sure you don't have too much money invested in technology stocks, stock funds, small cap growth or international.

Stay focused on your long-term investment objective, keep that percentage allocation under control and you will achieve a better return and maybe even reduce that risk at the same time.