Coined in the early 1600s by the author of Don Quixote, Miguel de Cervantes, the saying ‘don’t put all your eggs in one basket’ has since become a valuable metaphor for explaining ways to manage your investment risk.
Be prepared to lose a few eggs
Many people are reluctant to invest because they’re worried about risk. “What if I lose everything”, is often the first thing a rookie investor asks. While all investing does come with risk, the fear of losing ‘everything’ is somewhat misplaced if you’re sensible about where you choose to put your ‘eggs’. Ignore the sage advice and put all of your money into one company stock – the investing equivalent of putting all your eggs into one basket – and you’ll be taking a huge amount of risk, more so if the company stock you pick is an un-proven business, like a new tech company, for example. If it fails, the bottom falls out of your basket, and you lose all your eggs. There are less risky alternatives of course, like bonds, but with less risk comes a lower chance of good returns.
Put your eggs in different baskets
One way to lower your risk without sacrificing the potential for higher returns is to spread your money more widely. Each additional investment type and financial market you select for your hard-earned money acts like a separate basket. This allows you to be cleverer about how you invest your money. Why choose one risk level, when you can pick several? Mixing higher risk investments, like shares with less risky things like bonds and mixing emerging markets with more established ones, like the UK gives you the chance of higher potential returns, while helping to limit your overall losses. It also puts some distance between your pots of money, so that no one local ‘event’, like an Asian market wobble, or Brexit is likely to impact you substantially. Experts refer to this as ‘diversification’ and broadly agree that it’s the best strategy for most investors.
So, forget having just one basket – you need a cupboard full of them. Buy a mix of things like shares and commodities for higher potential growth and bonds and property for some stability. And avoid being too biased towards one region or market – aim for the investing equivalent of an around the world trip, hitting as many global destinations as you can fit in. If you don’t feel confident making the decisions yourself, there’s always a digital wealth management service (think of us like the investing equivalent of a travel agent) who can take care of it all for you.
Have an egg-cellent Easter!
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.