If you look at good material on investing for any length of time, you’ll read about diversification. This is the basic wisdom of not keeping all of your eggs in one basket. While there’s still no free lunch, diversification is a close second because on the average it both makes you more money and reduces your risk.
So, how do you do it?
Diversification is: investing not just in one company, one industry, or one market.
How Does it Work?
- Safety: If you own all stocks in the S&P 500, you essentially don’t care if several of them go out of business. After all, you own their competitors, too, and they’d profit more.
- Profits: Every company has ups and downs. When some of your stocks are down, others are likely to be up. You can more consistently make money.
How do I do it?
- Most passive index funds are low cost and pretty widely diversified. If you invest in a few of those, you have high diversification at a low cost in time and money.
Who disagrees?
- Some people are frantically searching for the next Apple or Microsoft. That would be fine, if it worked, but as a whole, investors can’t average a better return than the market as a whole. In 2011 research showed private investors getting 3.8% over the prior 20 years, instead of the 9% that the market returned. To be fair, that study includes several different kinds of self-destructive investor behavior, but you can see the point.
