Over the following weeks, we will be going through each of Nick Murray’s eight common investing mistakes. The second is under diversification.
Billionaires are made by under diversifying their investments (putting their eggs in one basket.) However, we can’t predict if the investments we chose will succeed or not, so it’s a gamble. And, as most people can’t afford to gamble with their hard-earned money, we diversify.
The desire to place all our bets on one thing can be strong, but it often ends badly. One investment can look like it’s going to endlessly climb and people are getting rich left and right (the GameStop craze of recent years comes to mind). However, nothing is infallible. That investment could drop, drastically and without warning. And if all our money is in that one thing… it spells disaster.
Spreading out our investments into various companies, industries, and countries protects us from getting killed by the volatility of individual investments. Even if one investment is taking a dive, the others may not be or may not be suffering as badly.
Nick Murray likens diversification to the tortoise in the story of the tortoise and the hare: it’s not fast or flashy, but it goes slow and steady and wins the race.
It won’t make us rich overnight, but if we can maintain the steady pace, it has the potential to give us the win we’re looking for: lasting wealth.
As Nick Murray says, “Diversification is the conscious decision never to be able to make a killing, in return for the priceless blessing of never getting killed.”
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