I saw a cartoon that cracked me up. A financial advisor sat on one side of the desk. The Easter Bunny, with a big basket of eggs, on the other. The advisor, leaning forward, warns the bunny: “Never put all your eggs in one basket!”
The advisor of course was giving his client the classic admonition: Diversify! Diversify! Diversify! Or put your money (eggs) into many different baskets.
You can significantly minimize risk by spreading your money out among the five asset classes: stocks, bonds, real estate, cash and commodities. Every asset class can be further divided into sub-classes.
The idea is that different asset classes, or sub-classes, react differently to various conditions and time periods. It doesn’t always work that way. Sometimes a turbulent sea sinks all ships.
But for the most part, diversification protects your overall holdings.
In fact, studies indicate that diversification accounts for 93% of a portfolios’ overall performance; 2% comes from stock picking; 3% from luck.
Two percent from stock picking!!! We make ourselves crazy trying to find the best companies, when we should be putting more energy into making sure we’re properly diversified over numerous categories
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