The Importance of Diversifying Your Portfolio

The Importance of Diversifying Your Portfolio

“Don’t put all your eggs in one basket!”

How many times have you heard that saying?

Probably hundreds. But do you know where it comes from?

It’s from Don Quixote, a two-part novel written by Cervantes in 1605 and 1615.

The full quote goes: “It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.”

Cool huh?

As you can see, it is a saying that has stood the test of time!

But what does this have to do with investing and trading, you may wonder?

Plenty.

In actual fact, it is one of our Golden Rules of Investing & Trading here at Investment Mastery.

One of our rules? Are you kidding?

Not in the slightest.

Let’s “break” it down.

Think of “eggs” as your sum of money to invest and the “basket” as the stock or crypto you are planning to invest in.

What would happen if you put all of your “eggs” (money) into just the one “basket” (stock/crypto)… and suddenly that basket falls to the ground and all the eggs are smashed to smithereens?

They’d be no good to you anymore, wouldn’t they?

In other words, that sum of money would be lost forever.

What you have really done by putting all your eggs in one basket is actually RISK LOSING ALL OF YOUR MONEY. Now at this point, having lost all your eggs, you would probably laugh or cry… with despair. (Which is kind of appropriate when thinking of Don Quixote as that book is a literary classic romantic tragi-comedy?)

However, crying or laughing, is not something you want to be doing. In fact that is another of our Golden Rules – keep your emotion out of it at all times. (But that’s another story).

So how do you avoid risking all of your money?

By not investing all your money into the ONE asset.

It is a big, fat NO! You don’t want to lose all of your investment sum in one go, do you? So why invest all of the money into one asset?

It doesn’t make sense, when you really think about it, does it?

Of course not.

You can calculate you diversified portfolio in compound interest calculator Now if you’re thinking we’re being a bit heavy-handed here going on about it, we make no apologies. It’s a LESSON you just have to learn if you want to become a successful investor and trader.

One of the most important lessons.

A fundamental analysis lesson.

Hence we drum it home!

Okay?

Now you know what “don’t put all your eggs in one basket” means and why it is important not to.

The next step is to understand that the main principle we’re talking about here is summed up in one word – DIVERSIFICATION.

Spread your pot of investment money over a number of assets.

What is an asset? It could be a stock… crypto… gold, silver, oil… even foreign currencies.

When looking at stocks, when you really look hard… you will see there are HUNDREDS of industries and companies you could invest in, or buy a share of.

The same with cryptos. Once there was just the one – Bitcoin. Now there are literally THOUSANDS. And that is why investing and trading is actually a lot of fun! Researching companies, different cryptos, commodities, watching the markets, checking their future growth and potential, it’s exciting.

And by investing a little with one here, a little over there, some with this one, some with that, you are diversifying.

Diversity – it’s talked about all the time when discussing employment, society and social interaction.

Well, it’s the same with investing and trading. You want to embrace diversity, be open to all possibilities and opportunities.

There is great beauty in that, being open and free, to explore and even boldly go where no one has gone before!

Crucially…

You are not putting all your eggs in one basket, you are not risking all of your money.

So when one asset goes down, it is not the end of the world. You have not actually lost because you have money in other investments.

It means you can accept that minor inconvenience – because that is what it is really. A drop in any of your asset prices is a mere inconvenience.

Ho-hum. Never mind. Just let it go. Leave it alone. It will go up again.

It really will. It always does. You just need to believe that and it will grow you as an investor and trader.

Because when you embrace and accept these things, and live with them, your confidence grows.

We don’t really like to call them rules – but that is what they are – although when you learn them and stick with them long enough they become second nature.

We prefer to think of investing and trading like that – second nature.

It is an art, in many ways. With a little science, the science of probability.

Math too, of course.

It’s like being back at school!

Which is why you are here, isn’t it?

So there you go – if you have ever wondered where “Don’t put all your eggs in one basket” means and where it comes from, now you know.

It’s all part of our mission here at Investment Mastery to share our knowledge, learning and further your investing and trading education.

We hope you enjoy it, as much as we enjoy doing it.

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