Don’t put all your baskets in one egg.

Diversification Explained

“Don’t put all your eggs in one basket” is a phrase my mom used a lot when I was growing up. (Although once, memorably, she fumbled it into “don’t put all your baskets in one egg,” so of course that’s now how the saying goes in my family.) Essentially, putting your eggs in multiple baskets means spreading out your risk – if one basket gets dropped, you won’t break all your eggs. It’s an old adage that makes for good advice in a number of different situations, but especially when it comes to investing.

Currently, with the market in a rough patch, a lot of clients are reaching out to us with totally understandable questions around why we recommend their allocation include particular asset classes – such as stocks from emerging or developing international countries, for example – that are performing poorly. When an asset class declines in value, that should be a indicator to move into something better performing, right? Unfortunately, it’s not that simple. Sometimes the ‘obvious’ answer when it comes to investing is the exact opposite of what will yield the best long term results. This is because when we’re asking these questions and looking at the performance of these funds, we’re inherently looking at the past, rather than the road ahead.

Novel Investor Asset Class Returns TableSource: NovelInvestor.com

In the above chart you can see that the asset class I mentioned, funds from emerging markets (noted on the chart in purple), is indeed at the very bottom of the list for 2018, with an annual return of -14.3%. However, emerging markets is a great example of an asset class that has been both at the very bottom AND the very top of the chart in various years, including back to back. In 2017, it was up 37.8%! From 2004-2007 it was up over 25% for four years in a row!

This is why creating a diversified portfolio that includes many different asset classes is so important: what is up one year may come down the next and vice versa. Of course everyone would love to be invested solely in the top class every year, but trying to somehow predict what that will be ahead of time is a loser’s game, especially if you’re betting your life savings on getting it right! Instead, putting those eggs into multiple baskets spreads out that risk and leads to more stable long term performance.

The opposite is true as well though – we’re hearing from a lot of folks saying they’re going to move everything to cash to somehow ‘wait out’ the current market volatility. After all, cash is actually sitting at the top of the chart in 2018, right? But if we go back the two years previous, we can see that those sitting on the sidelines uninvested missed out on HUGE returns. Additionally, with a downturn already in progress, getting nervous and selling out only locks in any losses you’ve had so far. Remember: stocks aren’t money sitting in a bank, they’re a tangible item. The number of shares you own never declines unless you sell. Therefore, if you expect those shares to be worth more in the future, you do yourself a disservice by selling them now.

Picking an age-appropriate, diversified strategy and investing for the long term isn’t as exciting as chasing the latest hot stocks or betting on “expert” advice from pundits trying to sell better ad time. But it’s what’s proven time and again to be the most effective. It’s human nature when we see a perceived problem – like watching an account’s value decline – to want to take action to fix it. We want to change something, try something new. But when it comes to investing, as long as you’ve got your eggs sitting in the multiple baskets of a diversified portfolio, you’ve already done the right thing. We’ve all heard the adage a million times, but even if the market has you mixed up, try your best to remember what’s important…. don’t put all your baskets in one egg.

Written by Laura Cerveny, blooom’s Director of Learning and Development

This information is provided for discussion purposes only and should not be considered as advice for your investments.

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