Don't chuck all your metaphorical eggs into one basket.
Ever heard the warning, ‘don’t put all your eggs in one basket’? This doesn’t just apply to risky career moves or dinner choices (share plates FTW), it also applies to your investment portfolio.
Having a diversified investment portfolio means you are spreading out your investments across different asset classes. A little bit in cash, a few bonds, a handful of Australian shares...You get the point.
But diversification can also go beyond just the asset classes. Once you’ve diversified your asset classes, you can also diversify your shares. Diversified shares within a diversified portfolio (now we’re getting real Inception). You may choose to diversify your shares across the finance industry, tech industry or energy industry.
If you have your metaphorical eggs spread across different baskets, it means that when one asset is performing badly, your whole portfolio isn’t taking a hit - just that particular investment.
In fact, your portfolio could still be performing well, because other assets are making up for it.
However, it doesn’t necessarily mean your investment portfolio is completely safe from losses. If the market crashes like it did in March 2020, then it’s likely your entire portfolio will experience losses.
Think about it like this. You’ve gone out to dinner with your mates and you’re betting on the steak. Your mate is going for the crab linguine. Your other mate locked in the fish. You like the sound of all of them, and you’re worried that if you just eat the steak you’ll be disappointed.
You all decide to share your meals - that way you get to taste a bit of everything. If the linguine and the fish turn out to be better than the steak, your overall dinner experience isn’t ruined.
But if it’s a truly terrible restaurant, all of those meals could still turn out to be bad.
Exchange-traded funds - aka a pre-mix collection of shares that you can invest in like you would any other stock - are a great way to achieve diversification, without having to do the heavy lifting.
These babies are generally less volatile than individual shares, because you’re investing in a big bag of different stocks.
You can trade ETFs at Superhero (which has $0 brokerage on ETFs) or ThinkMarkets.Alternatively, if you’re willing to do the homework yourself, you can do your own research and invest across a bunch of individual shares/stocks/asset classes to achieve diversification in your portfolio.
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