I’ve spent the past couple of weeks debunking various financial myths, such as the investment industry’s mantra that buy and hold is the only way to go and that the young can afford to take risks.
However, there is one rule that I (and my granny) wholeheartedly endorse. Don’t Put All Your Eggs in One Basket. It’s as true of investing and financial planning as it is of pretty much every aspect of life.
The technical name is diversification, but I like the eggs analogy. If you have too many eggs in too few baskets, you risk disaster should the basket (the stock market) fall. We saw it with real estate in the mid-’90s, tech stocks in 2000 and the financial sector in 2008.
Spreading your eggs over a number of baskets is the essence of defensive investing, which is absolutely the best approach for most people.
Right now, many investors are heavy into gold stocks or resource-based mutual funds, which have been riding high. But those sectors will have their day and that day will be done before the average investor realizes what’s going on. And it will go down much more precipitously than the rest of the market.
Diversification doesn’t just mean spreading those eggs among the various stock market sectors. It also means popping a few into nice safe baskets such as bonds, preferred shares and cash-like investments such as GICs or even just high interest (yeah, I know, an oxymoron these days) savings accounts.
However, avoid the temptation to fling those eggs too far afield, since over-diversification actually reduces return and increases cost.
We wouldn’t need to diversify if we all had shiny, clear crystal balls. But guessing which stocksectorcountry is going to boom and for how long has always been a mug’s game.
Alison Griffiths’ show Maxed Out appears Wednesdays at 10:30 p.m. on W Network. You can find out more at: alisongriffiths.ca
