Don’t put all your eggs in one basket

BY: FAZAAD BACCHUS 

In the world of investments, you should not put all your eggs in one basket, it’s too risky.

In primary school, we were taught this simple but very valuable principle. Most of us simply related it to the fact that if you literally did put all your eggs in one basket and the basket falls, then all your eggs would be broken, losing your entire basket of eggs. But consider how difficult it might be, as well as time-consuming to carry many baskets. It is so much easier to put them all in one basket and carry them safely.

As we grew in life while we remembered this principle, we may not have applied it to much. Let’s take for instance in the world of work, is it better to have many odd jobs or to concentrate our efforts on one? Well, definitely it’s better to have a good solid job than a few small ones. And yet I have heard many times over that you don’t bank on just one thing, but bank on many options.

So, what is the real story here or what should I do?  Well, concentrated effort brings you more benefits while spreading your efforts reduces your risk. Like our eggs example, one basket is easy to carry and can be done quickly, but many baskets would prevent all your eggs from breaking at once.

Regarding investments, if you concentrate your portfolio into a single equity or sector that is doing well, you will more than likely make more money than most people in the market, but if that investment starts to fail, then there is nothing you can do but wait until it comes back up. Therefore, it is better to diversify your portfolio, in other words, spread it out.

That now brings us to the question of how should you diversify. Well, first diversification should be between bonds and equity. Equity will grow faster but bonds will protect you in market downturns. Then there are corporate bonds and government bonds, government bonds pay less but are more stable than corporate bonds. There is local equity (Canadian) and then there is foreign equity, global equity, and international equity. In each equity carries a commodity, it could be energy, technology or precious metals for example. How much to put in each equity is a job for a professional advisor, his job is to make sure that you have a very good asset allocation.

If you decide to invest or are already investing, ask your advisor how much or what percentage of your money is in bonds, local or foreign equity and then you might have a good idea if he is protecting you from markets fluctuation and has diversified your portfolio well enough to make money, keeping your risk at a minimum. Unfortunately, not too many clients look into their asset allocation and most look at the returns.

To make money in the long run in the investment market, you need to diversify your portfolio. This is not a job that you can do by yourself and more than likely will not be done by your typical bank teller as well. To make the most from your investments, it would be better speak with a qualified financial advisor.