Some sayings might be cliches by this point, but they’re said so often for a reason. Perhaps one of the most important is one of the most often repeated – don’t put all your eggs in one basket. It’s dangerous to be too reliant on any one thing, as its failure can cause you major problems in the future. If you want an example of this saying in action, you need to look no farther than the world of investing. Failure to diversify properly isn’t just foolhardy – it’s downright dangerous. It is so dangerous, in fact, that you if you can’t diversify then you shouldn’t invest at all.
In theory, the riskiest portfolio available would require you to put all of your funds in a single stock or bond. When that stock or bond does well, you’d reap fairly massive rewards. If the stock fails, though, you’d be left with massive losses. Even if that stock remains fairly steady over time, your decision to only invest in a single stock or bond would mean that your financial rewards would be far less than if you had made the decision to spread your investments across the market.
Most would point to the volatility of any single stock, bond, or other types of investment as a good reason why you should always diversify. After all, it’s far less possible to predict how a single stock will perform than how the market will perform over time. In fact, a failure to diversify means that you’re not even going to be able to take advantage of market trends – if your single investment fails, there’s not always a guarantee that it will rebound the same way that the rest of the market would after an economic downturn. Single investments are simply too risky and offer too few rewards.
You can easily go so far as to say that an inability to diversify is an inability to really understand how to invest. If you’re just going with a single investment, what you’re really doing is gambling. You’re far better off simply putting your money into a savings account and getting the tiny gains from the bank over time. If you want to invest, you’ll need to spread your money out over several different potential investments so that you avoid market troubles and ultimately find a way to steadily grow your wealth so that you can accomplish all of your fiscal goals.
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