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Don't Put All Your Eggs in One Basket: Financial Tips to Diversify Your Investments
The American saying, "Don't put all your eggs in one basket," is used often to explain the concept of investment diversification. If you put all of your eggs in one basket, and it falls down, you will lose all of your eggs. However, if you diversify your investments and put your eggs in several different baskets, when one falls down, you will still have the eggs in the remaining baskets.
The key to investing wisely is to use different investment vehicles will perform differently in different market conditions. To continue the basket analogy, a wire basket will help under certain conditions, such as when there is pressure against it, while a plastic basket might help in another, such as when it it is raining, and a straw basket might help when it is put on a river. Putting your money in a variety of different investment options will help protect you from a variety of losses and will reduce the overall risk level in your investment portfolio.
Watch the video to get an overview of the concept.
There's more to it than stocks and bonds
Most investment bankers will tell you to diversify your investments by putting your money in a variety of mutual funds. They will recommend a variety of different stock funds and bond funds, like you heard in the video. This is true, you do need to put your money in both stocks AND bonds, and in a variety of each.
Keep in mind, though, that diversification should not end there. I learned this the hard way during the banking crisis in the mid 1980s. My bank had issues and was forced to freeze all its assets. Even though I had money in the bank, I was not able to take it out. I learned this again in the early 1990's. A different bank had incorrectly withdrawn the wrong amount from my checking account, causing many of my checks to bounce, which caused overdraft fees, which caused more checks to bounce. While I was waiting for things to settle down, I was unable to pay my bills. My advice is to put your money in more than one financial institution. If you wind up having a broker who embezzles funds or a company has a computer system crash, you will have money elsewhere to help tide you over until things are cleared up, if they are cleared up.
Other types of investments
Besides stocks and bonds, you should diversify your investments by putting your money in other investments vehicles. Real estate, businesses, savings accounts, CDs, 401k plans and IRAs, gold or other commodities, and savings and treasury bonds are all potential investment options to diversify your portfolio. They all carry their own risks and rewards, which are different from each other, so you do need to be aware of what you are buying and how they each fluctuate in different market conditions.
If you look at investments loosely, you are investing your time in your company. If your company fails, you will lose your job. If you also buy stock in the company, then you are not diversified, and both your employment and your investments will fall if the company goes under. If the company provides free stock benefits, or has a stock matching program, it might be worth the risk to buy the company stock, but you should be sure to also purchase other investments to stay diversified.
Diversification of You
Besides diversifying your investments, you also diversify yourself when you acquire training and education. Instead of learning only about the things necessary to do your current job, find how you can broaden your knowledge in a variety of topics. Keep fresh and develop new skills. If you lose your job, you can switch careers or find employment elsewhere.
You can diversify your income sources by having additional sources of income besides your job. If you can find ways to earn residual income, such as getting rent on an investment property, or money from a book, you will have a cushion if something happens to one income source. You can also consider become a member of Hub Pages by creating a Hub Page account and start writing hubs as an income source.
Another way to diversify yourself is to keep a savings account for emergencies and to buy life insurance. If anything happens to you, there will be other sources of income besides your employment to help pay the bills and expenses to take care of your family.
Diversification is important, not only for your stock portfolio, but your entire wealth portfolio. By investing your money in a variety of investment vehicles, and diversifying yourself, you will be able to manage risk and increase your wealth.