Why It’s Important to Diversify Your Assets

There is a saying: don't put your eggs in one basket. This creates a good visual that can help you understand why it's important to diversify your assets. If all your eggs are in one basket and you're walking down the street, it is easy to trip and drop the basket. When the basket falls, the eggs crack and (since they were all in the same place) you are left with nothing… but a mess! The same is true of your assets. If you keep everything in a single place or asset-type, you are more liable to lose what you have. If all your investments are in real estate for example, imagine what would happen when you woke up and found that your land had been devalued (as sometimes happens, depending on location). Or, if all your assets are in a foreign company, what happens to your wealth if that company is nationalized by the foreign state it is located in? Or, if everything you own is in the stock market, imagine waking up to find it had crashed – and everything you invested simply does not exist.

While these may sound like unlikely horror stories, the unfortunate fact is that they have all happened, at one point or another, to someone (or many people). This is why conventional thinking suggests diversifying your assets. It is based on the following logic: any one of those possibilities could happen. Real estate value could drop. Foreign companies could be co-opted. The stock market could crash. But, the chances of all that happening at the same time are very, very low. So if you have investments in all three areas mentioned (or others not mentioned), you are not likely to lose everything. Your eggs are protected.

Diversification is also important to a lesser degree. That is, the world does not have to be ending in order for you to reap the benefits of diversifying. If you diversify your assets, you can have some risky assets (such as stock in a foreign company working out of a developing nation) that could yield potentially high returns, and you can have some boring but very safe investments. This way, you can gamble and try to increase your wealth without throwing all your chips on the table. In a sense, you get the best of both worlds – acting as both a daring and risk-adverse investor.

If you have not diversified your assets, now is always the best time to start. Speak to your broker if you have one and begin the process (f.e. try to build a more balanced stock portfolio). But do bear in mind that this won't give you complete protection and you should not behave as though it does. You should always make your investments wisely, using care, thought and patience. Diversifying just helps you breathe better, knowing that if you do trip up not all of your eggs will be splattered.