What is diversification?

Diversification is the practice of not putting all your eggs in one basket.

With investing, it means spreading out what you are invested in so you aren’t over-exposed to any one particular idea.

Within a broad financial picture, it means having more than one income stream or making sure your equity is spread out between your house (if you own one), your business and your investments.

The danger of putting all your eggs in one basket is that you have no eggs if that basket gets crushed. If you have your eggs in 2 or 3 baskets, you only stand the risk of losing some of your eggs. It’s doubtful that all three baskets can be destroyed simultaneously. It is the same with investing and your finances.

There will always be investment trends, and when people get excited about a trend, they forget to diversify. And when that trend ends, they lose a lot of money and don’t have anything else to fall back on. Their basket was crushed, and the eggs are gone.

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