(MONEY Magazine) – The beauty of mutual funds is that they allow you to increase your wealth without much worry. For some people, though, funds eliminate the thrill of the hunt that comes with picking individual stocks. Yet the problem with building a stock portfolio is that choosing the 30 or so issues you need for reasonable diversification demands more spare time than most of us have. The solution: Build up a solid portfolio of mostly funds, but carve a slice out of your equity allocation to devote to individual stocks. Here are some guidelines.

How much should you invest in individual stocks? Personal finance experts suggest that you limit your individual stockholdings to 10% of your overall portfolio and no more than 20% of the equity portion. That's because individual issues face company-specific risks, such as a product failure, and so are more volatile than mutual funds. By limiting your direct stockholdings, you lower the chances that a couple of bad choices will crack your nest egg. Michael Stolper, whose Stolper & Co. in San Diego advises individuals on mutual fund investing, adds what he calls the "sweaty palms" test. "Imagine you're at a table in Las Vegas or Atlantic City," he says. "If you bet a dollar on each hand, you get bored. If you bet $5, your hands start to get clammy; beyond that point, you've probably gone too far." How many different companies should you invest in? Considering the time you need to find a sturdy stock and follow it, plan to hold no more than five at once. Where do you find good stocks? The initial lead can come from anywhere, including the financial news media, a trusted broker or friends. Since you already have a balanced portfolio of funds, you don't have to worry about diversifying and can focus your search on areas where you have special expertise, such as your work or a hobby. Perhaps you love to cook or build model airplanes or go camping. Your familiarity with the best products in that field may alert you to some growing companies that haven't been discovered by the general public. Don't rely just on instinct and hunches, however: To be successful, you need to do your homework. That means mastering investment basics and familiarizing yourself with the methods commonly used to value companies. It also helps to learn how to read annual reports and financial statements. (For detailed advice on evaluating stocks, see "How to Check Out a Stock Tip" on page 114.) The more time you put into making your selections, the better your returns are likely to be. Remember, even though you're doing your own stock picking because you enjoy it, making money is still your paramount goal.