It was in 1605, when Don Quixote said the words that still echo in business studies classes around the world: “It is the part of a wise man to keep himself today for tomorrow, and not to venture all his eggs in one basket”.
Don’t put all your eggs in one basket
Learning new things, being active, meeting different people, having a family...those are the things that really make for a rich life.
The same can be said of investing. To reduce the investment risk, it is wise to spread your investments in various asset classes (stocks, bonds, real estate, crypto, etc.). We would advise against investing all your money in the same assets class, companies from the same industry or in the most extreme case, one company, however convinced you are that you have found a real winner.
Although diversification is a very popular concept, some investors are challenging those beliefs. Put all your eggs in one basket and watch that basket closely is their usual response.
Put all your eggs in one basket
You must be wondering what the deal is now - should I put all the eggs in one basket or not? Don’t worry, we don’t want to confuse you; we do, however, want to set you up for smart investing.
Those who believe in this concept could be right if and only if one can be sure that by watching the basket around the clock you can guarantee it will outperform the market. Compared to diversification, this can be a full-time job. So, unless you’re confident in your ability to consistently pick great assets, diversification might be a better strategy. It can be used to provide a more consistent return over time while simultaneously reducing risk.
Let’s get practical!
What if you had €1000 to invest and two available cryptocurrencies (bitcoin and ether)? There are two possible scenarios - you could either choose to buy €1000 worth of either bitcoin or ether, or invest €500 in each (or any combination in between, but let’s keep it simple).
After a year, bitcoin goes up 10% while ether goes up 30%. Here’s a table of potential outcomes:
So what can we learn from the example above?
Firstly, diversification averages out the returns across the selected cryptocurrencies that you hold. Secondly, true diversification should try to mimic the market as a whole, meaning that you should pick a wider range of assets.
Unless you are an experienced investor who is spending countless hours monitoring your investments and searching for assets that will outperform the market as a whole, you might be better off diversifying your portfolio by simply “buying the market”. Doing so may provide a more consistent return and will undoubtedly save you time.
In closing, while diversification does take away some of the excitement, it also makes for a more soothing investing experience. But if you enjoy the adrenaline experience, there's always Disneyland.