We’ve all read it. Diversify your portfolio. But what does it really mean? Well, the easiest way to think of diversification is don’t put all your eggs in one basket!.
Maybe that’s all you needed and now you have the ‘aha’ moment. Goodbye.
If you’re still not sure, then read ahead. The basic idea is this:
Imagine you go grocery shopping with a flimsy paper bag. You’re hungry so end up buying a ton of groceries.
Now at the checkout counter, you’ve realised that there is a 99% chance this bag falls apart and you’ll never make it home with all the groceries. But you’re smart, so you buy 2 more paper bags at the counter.
You carefully place the items across the three bags and successfully make it home without feeding any of your groceries to the street! Heck, you even bought a couple of chocolate bars at the counter cause you could easily fit them in.
The bags could’ve still fallen apart but you significantly reduced the chances of that happening by spreading the groceries across the three vs. putting them all in one bag.
That’s the basic idea behind diversification. The paper bags are assets we invest in, the groceries are our money, and the street is that void that eats up negative value.
Diversifying your portfolio is about decreasing the likelihood that you lose your money by investing across different types of investments. There is even research to suggest that it can increase returns in the long-term.
Of course, this is a simple explanation and there are many ‘ifs’ and ‘buts’ related to diversification but we’ll cover that another time.
