One of the oldest and wisest sayings in the investing world – but one that is sometimes overlooked – is “Don’t put all your eggs in one basket.”

The message, of course, is that if the basket drops, all your eggs may crack and break and you could be left with nothing. Likewise, if you put your money into just one investment or investment type, you risk a similar catastrophe. Just as investing solely in individual stocks could expose you to more risk than is appropriate, putting every dollar in an FDIC-guaranteed bank account means it’s unlikely your savings will grow enough to contend with inflation. In either case, you could be left with egg on your face.

The solution? Diversification. the core investing practice of selecting a variety of investments to lessen a portfolio’s overall risk. Most investors understand that diversifying their portfolio is a good thing, but some may struggle with how to do it. To be diversified, it’s not enough to own a “collection” of funds – you have to own funds across different asset classes, and those funds should work together holistically to help you reach your investing and retirement goals. To help determine if you’re truly diversified, ask yourself these questions:

Does my portfolio include more mutual funds than single stocks?

A mutual fund is a group of investments, usually stocks and/or bonds. Mutual funds are often preferable to single stocks because of their inherent diversification, convenience and lower costs. By spreading your capital over dozens of investments, a mutual fund can help avoid the risks associated with purchasing a single stock. It also offers increased transparency to make it easier to see where your money is going – not to mention access to a professional fund manager .

Do my mutual funds invest in different types of companies and industries?

You might invest in 10 different mutual funds and as a result think you’re well-diversified. But what if most of those funds focus on U.S. large-cap stocks or one specific sector of the economy? For example, a portfolio consisting of only technology funds could obliterate your life savings should Facebook and Yahoo! go bankrupt, but a portfolio of funds invested in various asset classes – including bonds and stocks – across different types of companies and industries will help limit the impact of the market’s ups and downs on your bottom line.

Do I apply my investment strategy across all of my retirement accounts?

We could make a strong case for consolidating multiple retirement accounts – reduced fees and ease in tracking performance, for starters – but if you’ve got a traditional Individual Retirement Account (IRA). a brokerage account and a couple of 401(k)s from previous jobs out there, it’s essential you make sure your savings are invested appropriately in all of your accounts. You should diversify across the same asset classes and at the same percentages to help avoid becoming overly exposed to any single investment-style category.

Along with other time-honored investment practices such as dollar-cost averaging. diversification is one way to help manage your portfolio’s risk and position you to reach your long-term investing and retirement goals. However, no matter how diversified your portfolio is, all investments carry some risk, and that level of risk changes depending on what’s happening in the world.

Selecting mutual funds can be a complex process – there’s no “magic number” of funds you should hold in order to reap the benefits of being properly diversified. Consider working with an investment advisor who can help you sort through market fluctuations and identify an asset class’s risk level over time, so that your portfolio is invested in a manner consistent with your risk tolerance and goals.