A Basket Full of Smashed Eggs?
“You’re putting all your eggs in one bag” – Smithy, Gavin & Stacey Series 1 Episode 1. Smithy gets it. This was in the first episode of Gavin & Stacey.
Similarly, if personal finance had a TV series, ‘Diversification’ would be covered in the first episode. In times of crisis – like the health crisis we’re going through now – it’s ever more important to make sure that our money is invested in the right places.
In this situation, think of your money as an egg. The basket could be a share in a big company, such as Easy Jet (who have been heavily affected by Covid-19). Before Covid-19 hit, you may have been pleasantly surprised with how your investment may have been performing.
On the April 3rd 2020, the Easy Jet share price fell to its lowest in years, dropping 69% from it’s highest figure during the year on 11th February 2019. That means you would have seen a massive drop in your hard-earned savings. BAD!
The premise behind diversification is avoiding this very thing, by putting your eggs into lots of different baskets inside lots of different trollies in lots of different supermarkets all around the world.
That way, if one of the baskets breaks, the rest of your eggs don’t feel the impact (or at least not as bad).
What does a diversified portfolio look like?
Now that is a diversified portfolio!
As you can see, the money is split between lots of different investments (equities, gilts, etc.) across lots of different countries (North America, UK, Europe, Japan, etc.).
The eggs are in lots of different baskets, in lots of different trolleys, in lots of different supermarkets all around the world.
Why is it important now?
In times of a global crisis like this, very few of our investments, no matter how diversified they are, will have performed well. However, good portfolios will have diversified the risk through being invested via several different countries and sectors, in many different things.
Of course, everyone holds little bits of lots of different companies. You may even have Easy Jet in your portfolio without realising. The important part is that all of our money is spread out, so one company going under doesn’t affect the whole portfolio.
Where can I find out if I’m diversified enough?
We will be looking more at the ‘eggs’ in following weeks and what the different types of investments are.
For now, though, you can go FE Trustnet and see how diversified your portfolio is by putting all the different holdings in.
Or, if you don’t fancy doing that, just give us a ring for a free appointment. We will be able to complete a quick analysis to see if all of your eggs are in one basket (or bag).
Please note that with investing your capital is at risk and your money can go up or down at any time.