You probably have already heard about the saying “don’t put all eggs in one basket.” Playing farm and collecting eggs is a nice game to play with kids. They have make-believe chickens, wicker baskets, and colorful plastic eggs set on makeshift chicken coops. This is a great way to teach children about money and even the concept of diversification and investments.
The simple logic behind this is that if the basket falls or topples over, the entire basket of eggs can get broken. It’s the same with putting your investments in a single financial instrument. You can lose everything you have when the company you invested in goes under.
The concept of diversification involves spreading your investments in instruments of varying risks, potential yield, and maturity. The entire investment portfolio should be composed of several baskets. You ideally should have a balance of low risk and high risk investments. The higher the risk,, the higher the potential yield. When one basket of particularly risky investments results in losses, the gains from the other baskets of investment should compensate for such losses. The gains from your other investments should be enough to still result in modest gains even after you’ve taken into account your losses.
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At the very least, you should have the same number of eggs that you started with. This way, you still have enough to invest again using a more carefully thought out investment strategy. An important thing to learn about diversification is that it’s not just a matter of randomly choosing your “baskets.” You still have to choose wisely. The level of risk is not necessarily a guarantee of anything. It simply says that one is more likely to result in significant losses than others. This is not to say that you cannot lose money on a low risk investment. If you are not careful, you could still drop the basket and lose your eggs.
Don’t Put All Eggs in One Basket: Some Ideas Where
Study the investment instruments that you are going to put your money in. Never put money that you will need in the near future in any investment instrument. For many investors, this tip is applied to money that they cannot afford to lose. The money that you invest should be money that you intend to grow for the medium and long term. This means money that you will not touch over the next ten to fifteen years.
When you are wise about choosing the baskets you put your eggs in, you can hatch more eggs in the future – who knows, you might just find golden eggs in your baskets after a few years.