(MONEY Magazine) – Q I believe in buying and holding high-quality stocks. Nearly 60% of my portfolio is in mutual funds; the rest is split among 13 stocks, including Altria, Citigroup and GE. Is that too many? --Kevin Jackson, Chalfont, Pa.

ANSWER How many individual stocks (as opposed to ones owned through mutual funds) are too many? That's like asking how many house pets you should have. The answer: no more than you can keep track of. For some people, that means no stocks, just mutual funds. But if you want to closely follow more than a dozen stocks and funds, that's fine.

Your real problem isn't how many stocks you have; it's how few places you've stowed them. Upon plugging your holdings into Morningstar's "Instant X-Ray" (at morningstar.com; click on Tools), Answer Guy found a portfolio screaming for diversification. You've got a quarter of your money in just three stocks--"an awful lot of risk," says Buz Livingston, a financial planner in Santa Rosa Beach, Fla. Between your funds and individual stocks, you have 89% of your equity holdings in big companies and just 3% in small-caps. Boosting the latter's share will make your portfolio safer and likely improve returns over the long haul. Livingston suggests a 15% allocation to small-caps, mostly in index funds. To avoid selling stocks and paying taxes on gains, use your large-cap dividends to buy the small stuff.

Q If I buy company stock in my 401(k), I get a 100% match in stock, limited to 5% of my salary. I know I should always take a match, but I also know that my employer's stock shouldn't dominate my portfolio. (It's now at 77%.) So do I pass up free money? --Bryan Moore, Little Rock

ANSWER That's a tough question. Luckily for you, though, you won't have to face it much longer.

Mindful of how the WorldCom and Enron bankruptcies ruined employees with company stock in their retirement accounts, Congress recently passed legislation intended to lessen the risk of employer stock in 401(k) plans. Starting with the first plan year that begins after Dec. 31, companies can't require that you buy a particular security (say, company stock) to qualify for a match. So put your future contributions in diversified investments. If your employer continues to match your contributions with stock, you'll be able to trade out of it after three years. And those company shares you have now? Next year you can start unloading what you've bought; the law lets you sell the shares your employer gave you, a third at a time, over three years.

Looking for some answers? Send us your questions about investing.

E-mail answer_guy@moneymail.com.