They say to make an omelette, you’ve got to break some eggs... but if you carry them all in a single basket, one trip and they’ll not even make it to the frying pan!
In simple terms, the old adage of “not putting your eggs in one basket” is about mitigating risk by spreading your resources. That way, one slip up doesn’t have to mean losing everything in one go.
And in the world of investment, this is also an apt metaphor for a technique known as “diversification”.
Much like the ethos of the original adage, diversification is all about spreading your money across a variety of assets, industries, and regions so that if one area performs poorly, other investments can help to offset the impact – reducing the overall risk.
As risk can be a common deterrent for those looking to get into investing, learning to not put all of your eggs in one basket could be a great way to get started with an added sense of security.
You can jump to a specific section below:
- Why you shouldn't put all your eggs in one basket
- Understanding the different types of investments and markets
- Advantages and disadvantages of diversification
- How to diversify your investments
- Common mistakes to avoid when diversifying
- Conclusion: balance is key
Why you shouldn't put all your eggs in one basket
Putting all your money into a single investment may feel like a confident move, but it exposes you to what's known as “concentration risk”.
If that one investment takes a hit – whether it's a company share, a property, or even an entire sector – your entire portfolio suffers.
It’s like betting everything on one horse. If it doesn’t win, you could lose the lot, or at best have to take a significant loss.
Real-world examples of this are everywhere. Think of the dot-com bubble in the early 2000s, where investors flocked into tech stocks, only to see many collapse overnight.1
Or more recently, cryptocurrencies that initially soared, then crashed, wiping out the savings of those who had no safety net elsewhere.2
Even blue-chip companies aren’t immune! Anything from a sudden scandal, to a market shift, or even a change in regulation can cause once-reliable stocks to plummet. If all your money is tied up in one place, there’s nowhere to hide.
That’s exactly why so many experienced investors will tell you, “don't put all of your eggs in one basket”.
Diversification is the process that helps investors avoid these less-than-ideal scenarios.
By spreading your investments across different assets, sectors and markets, you lower the chance that a single failure will take down your whole portfolio. It's not about avoiding risk altogether, but instead, about managing it wisely.
Understanding the different types of investments and markets
When we say “don't carry all your eggs in one basket”, you may wonder what exactly the basket represents...
Well, in this context, the basket refers to different types of investments, also known as equities. So, let’s take a look at what the basket might be woven from in the world of money and finances:
- Shares (also known as equities). These offer a way of owning a small part of a company, and their value may go up or down depending on how that company does. While shares have growth potential, they can also be volatile.
- Bonds. These are loans to governments or companies that pay you interest over time. In investment terms, they are generally considered more stable, but they also tend to offer lower returns.
- Real estate funds. These allow you to invest in property (like offices, flats or retail spaces) without owning a building yourself. They can provide regular income and long-term growth, but returns can be affected by the property market and wider economy.
- Commodities. These are physical goods (like gold or oil) – they don’t produce income but can hold or grow in value during times of market uncertainty, helping to protect against inflation or stock market dips.
But diversification isn't just about asset types. It's also about where and how you invest.
For example, investing only in UK-based assets could leave you vulnerable to local economic changes. By looking to international markets – whether in Europe, the US, Asia, or emerging economies – you can spread your risk while also opening yourself up to new opportunities. Finally, there’s also sector and industry diversification. Even within shares, spreading your investments across a range of different industries - such as healthcare, technology, energy or finance - means you’re less exposed if one sector suffers a downturn.
By mixing your investments across different asset types, regions and industries, you're baking resilience into your portfolio.
Blindly chasing returns can lead you running off a cliff edge, but diversification gives you the potential to maintain a (broadly) forward momentum, with a reduced risk of any sudden sheer drops!
However, please remember in all scenarios that the value of investments can go down as well as up, and you could get back less than invested.
Advantages and disadvantages of diversification
While diversification certainly offers potential plusses, its core principle of managing risk still comes with some trade-offs. So, let’s dig into the key advantages and disadvantages.
One of the main advantages is that it helps reduce the overall risk of your portfolio. As discussed, if one investment performs poorly, a diversified portfolio can generally offer more resilience as other areas can help to balance things out.
This often leads to a smoother experience over time, with fewer dramatic highs and lows.
Diversifying also opens the door to a wider range of opportunities, as you’re not tied to the fortunes of a single company, sector or market.
However, spreading your money too thinly can dilute the impact of top-performing investments. It also makes your portfolio more complex to manage and monitor.
In strong ‘bull markets’, when most investments are doing well, a diversified approach might deliver lower returns compared to more concentrated strategies. On top of that, costs can rise as you add more funds, platforms, or products into the mix.
In short, diversification is about balance: lowering risk without limiting your potential too much. It’s not foolproof, but it’s a strategy many investors use to stay steady through uncertain markets, and a key reason people say don't put your eggs all in one basket.
How to diversify your investments
So, you know the pros and cons of diversification, but how do you actually do it?
Well, there are two main ways to diversify: you can do it yourself by researching and choosing individual investments, or you can use managed funds, where professionals spread your money across a wide range of holdings on your behalf.
Funds can be a simple and effective route to instant diversification, while DIY gives you more personal control and oversight.
Timing can also help. By investing regularly over time, a method known as pound-cost averaging, you reduce the risk of buying at a market high.
You could also look at a method known as rebalancing. This is the process of reviewing your portfolio every now and then to make sure it still matches your goals and desired risk level. If you invest with Wealthify, our investment experts will do this for you.
Of course, diversification doesn’t guarantee profits, but it does make it less likely that one poor-performing investment will significantly damage your overall returns.
It’s a steady, long-term strategy that is designed to help keep your investments on track.
For more information, read our blog on DIY vs Managed Portfolios.
Common mistakes to avoid when diversifying
While diversification does offer that slow and steady way to keep your investments balanced and – in an ideal world – profitable, it’s important you approach it correctly.
At a certain point, adding more and more to your portfolio doesn’t just spread risk, it can actually dilute your returns and make your portfolio harder to manage.
In other words, don't put all your eggs in one basket, but also avoid spreading them so far and wide that you can’t remember where you put them.
Another potential pitfall with diversification is relying on assets that appear different but are actually closely linked.
For example, investing in several global tech companies may seem diversified, but if they all react the same way to market shifts, you haven’t reduced your risk much at all. This is known as holding correlated assets.
It’s also important not to overlook the costs involved. Spreading your money across multiple investments or funds can lead to higher fees and transaction costs, which may eat into returns over time.
And, of course tax implications matter too. Holding investments in the wrong type of account can lead to unexpected tax bills that reduce your profits. Remember, too, that your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
A well-diversified portfolio balances different asset classes, regions and risk levels without becoming bloated, inefficient, or generally unmanageable. Especially when managing this yourself, be aware of not letting your portfolio become unwieldy.
Instead, you could think about focussing on how the different portions of your portfolio behave, how they’re taxed, and – if using a managed fund – how it is managed along with any associated fees.
Overall, diversification is all about protecting your investments, not complicating them.
Conclusion: balance is key
In all areas of our life, we want to aim for balance – whether it’s in work, lifestyle or health. And the same goes for managing an investment portfolio, too.
Diversification, when done well, spreads your money across a range of investments to help reduce the impact of any single area underperforming. It won’t eliminate risk entirely, but it can help smooth the journey and build a more resilient portfolio.
If you’re already investing and unsure of how well-balanced your current strategy is, now could be a good time to take a step back and review it:
- Are you overly reliant on one asset, industry or region?
- Are you unintentionally holding overlapping or correlated investments?
If you're feeling overwhelmed by the complexity, you're not alone.
That’s exactly where Wealthify can help. Our investment experts build and manage diversified portfolios tailored to your chosen risk level, so you don’t need to worry about picking stocks, watching the markets, or rebalancing regularly.
In other words, we decide how to divide out the eggs on your behalf, so you can decide how you want to make the omelette in the future.
Ready to learn more about how investing could work for you? Visit our Why Invest page to see how Wealthify makes investing simple, accessible and smart.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
