One of the most enduring pieces of personal finance advice is to never put all your eggs in one basket. It means don’t put all your savings into one investment.
The opposite is diversification, or investing your eggs in multiple baskets, that aren’t carbon copies of each other. Doing this helps prevent regular investment losses when markets fall. But it also stops people losing their entire savings in scams, which happens all too often. Best to take a hit on 10 per cent of your savings than 100 per cent.
Diversification in plain English means having a bit of property, some different types of shares, and other safer investments such as term deposits. It also means spreading your money geographically so not everything is dependent on the New Zealand economy. Basic diversification could save so many people from financial disaster if they’d just listen.
I mention “carbon copies” because investors sometimes split their money between lookalike investments. The classic example of this was people who spread their savings across multiple finance companies in the leadup to the Global Financial Crisis [GFC]. Most of the finance companies took investors’ funds and lent the money to property developers, many of whom came a cropper in the GFC. When the developers couldn’t make repayments, the finance companies crashed and burned, taking thousands of ordinary people’s savings with them.
It’s important to actually understand what you’re investing in. I sometimes see people posting online who don’t know the difference between a finance company and a KiwiSaver fund. They’re very different when it comes to levels of risk.