You’ve all heard the old saying “don’t keep all your eggs in one basket”…I’m sure. I find it very tiring myself. Sometimes I wonder if people even really understand what they are saying.
The “eggs in one basket” refers to losing everything you have all at one time. In the investment arena, it means “don’t invest in one fund, stock, bond, etc.”
You want to know what’s dumb about this line of thinking? People often don’t discriminate between what they can and can’t lose money in. If you are investing in a fixed interest financial product, like a bank CD, you can’t lose any of your money (well, at least not due to the CD itself anyway…inflation is another matter).
So…if you could beat inflation and could get a fixed rate of return, there is no “basket” that you need to worry about, because all of your “eggs” will be completely safe.
This could be analogous to taking a wad of cash and dividing it up into several different pockets in your jeans and coat before going for a walk downtown at night. The thought process being if you get mugged, maybe the robber won’t get all of your cash because it’s “diversified”…
…but, why not just put it into a pocket that you know the robber won’t ever find? Or, leave it at home?
The next time someone tells you that you shouldn’t put all of your eggs in one basket, ask them “why”…usually you’ll get an answer along the lines of “so you don’t lose everything if something happens to that “basket”…then ask “what if my basket is safe?”
…they’ll likely laugh at you. The point is…it’s OK to diversify, but don’t diversify for diversification’s sake. At least have a legitimate reason for “spreading out”. And, if you find a good basket, don’t worry so much about diversifying out of it.
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This entry was posted on January 7th, 2012 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Investing