The answer to the second question is get a professional to work with you. The answer to the first question is diversification is not, repeat, NOT 32 different stocks or five mutual funds in the same sector. One thing I learned early in this business is the majority of investors want the highest possible return on their investment. These same investors, though, want assurances that their principle will remain intact. In this first instance, we always seek the highest return with an investor's parameters.
Markets fluctuate and so do values.
In the meantime, I've put together some hypothetical portfolios that should illustrate the point of diversification. The investor seeks growth potential, while realizing high current income from dividend producing stocks. The Equity Income investment, the investor tells me, will give variety to the plan. No, not that it's not diversified, because mutual funds as a rule are diversified and, granted, the risk is spread with mutual funds. But the investor wants to invest in what is basically a single-sector and if that sector goes south, you know the rest of the story.