We’ve all heard the saying, “Don’t put all of your eggs in one basket”.
But what does that really mean?
WHAT DOES THIS MEAN?
Picture yourself on a cold winter day, heading to the chicken coop to grab eggs.
You take one basket.
After gathering all the eggs, you head back to the house to start making breakfast.
But along the way you slip on a patch of ice – cracking every single egg in the basket.
You’re all out of eggs now.
Originally taking two baskets and making two trips sounded unnecessary, but now that all the eggs are gone it would’ve been worth it.
When you diversify your assets, you are separating assets into different baskets.
To prevent losing all of your eggs.
And it sounds intimidating or maybe even unnecessary to some, but you don’t want to look back after losing all of your eggs and wish that you did diversify.
When you practice diversification, you spread out your money into different types of assets or investments to reduce your risk of losing those assets all while still growing your money.
WHY IS THIS IMPORTANT?
Reducing your risk is the main reason why you separate your investments or your “eggs”.
You don’t want to risk destroying your financial future if you lose your one basket.
When you diversify you can still invest your money without risking it all on one investment.
This is one of the basic principles of investing.
HOW TO DO THIS?
So, what investments and assets can you do this with?
Here are the common assets that you can build your portfolio with:
- Mutual funds
- Single stocks
- Bonds
- Exchange-traded funds (ETFs)
- Index funds
- Real estate
- Cash equivalents, (CDs or savings accounts)
If you’re a homeowner, then great news, you are already somewhat diversified!
Of course, you can have other real estate investments, but owning your home is another way to build equity outside of your investment portfolio.
Mutual funds are naturally diversified, so by investing in mutual funds you are already separating your eggs. This is why mutual funds are the recommended type of investment.
You can take this diversification a step further by investing in the following mutual funds:
- Growth and income funds
- Growth funds
- Aggressive growth funds
- International funds
Single stocks are exactly how they sound, a single stock.
Which has no diversification. Learn more on the gamble of single stocks here.
And when it comes to Bonds, EFTs, and Index Funds –
Good mutual funds will often beat these investments.
Even though there is always some risk involved, investing is important. Because your money won’t keep up with inflation if you keep it in a savings account.
Learn how to diversify your portfolio, so you can invest wisely. Focus on long-term growth rather than risking it all with short-term gains.
And most importantly, don’t keep all of your eggs in one basket!
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