To be well diversified, you want a group of funds that will perform differently in any given type of market. What you should look at is what professionals call correlation. Correlation measures the relationship between two different properties.

If two funds correlate 100 percent, they always move in lockstep. That is expressed as a correlation coefficient of 1, or a "perfect positive" correlation. For instance, the Vanguard Index 500 always moves in lockstep with the Standard & Poor's 500 Stock Index. "Perfect negative" correlation is expressed as a correlation coefficient of -1, in which the two track in exact opposite directions. Of course, few pairs of investments move either in tandem or in totally opposite directions. Most are somewhere in between. And you can't start out with a dozen different funds. Nor do you need to. You can start with one - and build a starter portfolio with just three.