How did you do in 2000? The answer probably depends on how well your portfolio was diversified. Indeed, look at the returns of the following three indexes, Nasdaq Composite, Dow Industrials, and S&P 500:

Nasdaq composite: down 39%
S&P 500: down 10%
Dow Industrials: down 6%

Clearly, if your portfolio was focused exclusively on technology stocks and other Nasdaq issues, you were beaten up pretty badly in 2000. If, on the other hand, you had a diversified portfolio of stocks that included the type of large-cap stocks that are in the S&P 500 and Dow, you probably didn’t have too bad a year.

The year 2000, with its varied performance between market sectors, is an excellent example of why it is always important to maintain a diversified portfolio of stocks. True, sometimes having a diversified portfolio can limit your returns (just ask anyone who had lots of non-tech stocks in 1998 and 1999). Still, having a diversified portfolio can allow you to escape some of the carnage that can hit individual sectors. And since investing is a marathon, not a sprint, a diversified portfolio can help keep your money in play for a long period of time.

What sectors will perform the best this year? Quite frankly, your guess is probably as good as mine. And precisely because nobody knows for sure what groups will perform the best, you owe it to yourself to make sure you have all your bases covered by having a diversified portfolio of stocks covering a variety of industry sectors and stock sizes (small-cap, mid-cap, and large-cap).