Diversification Explained: Don’t put all your eggs in one basket

If there is anything I’ve learned from a combination of working in finance and being an entrepreneur, it’s that the old adage ‘don’t put all your eggs in one basket’ is true. Now that goes with choices around your business, but even more so, with your finances and more specifically, your investments.

Currently, with many markets around the world in a rough patch, a lot of people are left wondering what the right decision is, and while there are many answers to that, a very general one is diversification.

According to Blooom a lot of clients are reaching out with totally understandable questions around why they recommend their allocation to include particular asset classes – such as stocks from emerging or developing international countries, for example – that are performing poorly. When an asset class declines in value, that should be an indicator to move into something better performing, right? Unfortunately, it’s not that simple. Sometimes the ‘obvious’ answer when it comes to investing is the exact opposite of what will yield the best long term results. This is because when they’re asking these questions and looking at the performance of these funds, they’re inherently looking at the past, rather than the road ahead.

 

Source: NovelInvestor.com

In the above chart, you can see that the asset class, funds from emerging markets (noted on the chart in purple), is indeed at the very bottom of the list for 2018, with an annual return of -14.3%. However, emerging markets are a great example of an asset class that has been both at the very bottom AND the very top of the chart in various years, including back to back. In 2017, it was up 37.8%! From 2004-2007 it was up over 25% for four years in a row.

At this point, it’s necessary to create a diversified portfolio that includes many different asset classes, since we know they can go up and down through the year. And, while we would all like to be able to put our money into one source that will yield the highest results, the true reality is that a stable plan for the future includes putting your eggs in many, but not just any, baskets. Where you place your money should also be thought out based on what works best for you, so you’re making smart choices that keep the risk low while making for a stable financial future.

The opposite is true as well though – according to Blooom, they are hearing from a lot of folks saying they’re going to move everything to cash, to somehow ‘wait out’ the current market volatility. After all, cash is actually sitting at the top of the chart in 2018, right? But if we go back the two years previous, we can see that those sitting on the sidelines uninvested missed out on huge returns. Additionally, with a downturn already in progress, getting nervous and selling out only locks in any losses you’ve had so far. Remember: stocks aren’t money sitting in a bank, they’re a tangible item. The number of shares you own never declines unless you sell. Therefore, if you expect those shares to be worth more in the future, you do yourself a disservice by selling them now.

Making a plan that fits your age, stage, and ultimate goals really is the way it works with investing, and the best way to do it no matter your age has been proven over and over, make sure you diversify your portfolio. That applies right across the board and in case you’ve heard enough references to eggs, think about it this way; you could plant one pack of seeds in one planter and hope for the best, or you could fill many planters and see your plants Blooom, I’d say the choice is obvious.

This information is provided for discussion purposes only and should not be considered as advice for your personal investments. 

This is a sponsored post in collaboration with Blooom and ADDICTED Media Inc.

 

markmunroe

markmunroe

Founder, CEO at Addicted
Mark Munroe is the Creator and EIC of ADDICTED. He's ADDICTED to great travel, amazing food, better grooming & probably a whole lot more!
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