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 how you could manage your risk when investing in the stock market. Here's why.
Diversifying could spread your risk
Many people are reluctant to invest because they’re worried about risk. And we get it – no one wants to lose money. But while all investing does come with risk (and you can't eliminate it completely), not putting all your eggs in one basket by diversifying your portfolio could you to mitigate this.
Basically, if you invest in just one company, you're solely relying on it to do well – and as we know, the markets go up and down, and they can be impacted by many factors, like news events, and market and economic trends.
'Diversifying' your portfolio means investing in a range of assets (like stocks, bonds, commodities, and property, and indexes from around the world (such as the UK's FTSE 100 or the S&P 100 in the US), as a way to spread your risk. This means that any poorly performing investments could be balanced out by ones that are doing better, and local events (like Brexit) could have less of an impact.
If you sell your investments when they're down, you're essentially 'cementing' your losses and making them real. Diversifying means that if you do have to sell your investments, you're less likely to lose all your money as you can sell the ones that are performing better at that time and hold onto any that are down in value, giving them the chance to go back up in future.
How to diversify your investments
As we've already explained, diversifying your portfolio is as easy as investing in a range of assets and regions. For example, you could mix 'higher' risk investments (like shares), with bonds, which are often thought of as being less risky.
You could also mix emerging markets with more established ones, like the UK. Emerging markets are commonly associated with what we call 'developed' countries, and they could present a higher risk of 'volatility' (which refers to movements up and down in the value of your investments).
But what if you don't feel confident choosing what to invest in as you've never done it before, or you just don't have the time to do the research needed?
At Wealthify, we have a team of experts that will do all the investing for you. Choose the type of Plan you want, let us know how much you want to put in, and tell us about your appetite for risk. We'll then build a diversified portfolio and manage it for you, making changes as and when needed to help keep everything on track. Find out more about how we invest.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Seek financial advice if you are unsure about investing.