"Don't put all your eggs in one basket"

It is a common phrase that you hear on the lips of many. It is true that you should never throw in all your nest eggs into one basket. That basket may fail to work for you one day or the rattan may just snap. Your eggs won't be safe! Regardless how sturdy your basket may be, there is still a chance of it not holding well all the eggs you place in.

Then, how many baskets will suffice if one does not serve us well?

Having seen how supply chains work, it is only normal and recommended to have 3 to 15 suppliers to serve the needs of a huge Fast-Moving Consumer Goods (FMCG) company. Imagine having just 1 supplier providing 80% of your production... you are at risk of the supplier threatening an increase in prices or if the supplier winds up!

The baskets that I'm referring to here mean your portfolio across asset classes, industries, and geographies. Self-sufficient retail investors may place their trust fully in one market and then bear the brunt of a sudden onslaught of geography-specific developments e.g. US Fed rate hikes and China's regulations on tech and data. The S&P500, although should be widely diverse across geographies with multinational corporations on board, it could still pose a concentration risk. The idea that these companies could have achieved such growth could be due to their exposure to certain geographies and thus missing out the opportunities that are not within the radar. We, too, see high correlations between US specific news and the fluctuations of the S&P regardless of geographies as well!

Alternatively, investors may also see themselves trapped in one asset class such as that of stocks. While it is true that the world's richest people are where they are through equity investments or owning a wildly successful company, let us be more grounded in our thoughts. We are more likely to be normal human beings and we may not have the ability or the creativity to generate such wealth.

A fall in stocks worldwide may leave you on tenterhooks whereas on the contrary, debt instruments such as bonds or simple money markets may help you maintain your footing to tide through the difficult times. The Dotcom Bubble and Global Financial Crisis saw stocks plunged but Fixed Income rising, while the Taper Tantrum in 2013 helped equities on the expense of bonds. Being well-balanced is an art in such turbulent times.

Cryptocurrencies on the other hand, in my view, tends to be more of a speculative instrument rather than that of an investment. Its use cases remain in question and there is no pegging of its value to any real-world asset unlike bonds being tagged to asset liquidation and equity being tagged to the promise of future profits. It could serve us well in the short-term but please be wary on how much you are willing to forego!

But despite the importance of diversification, the cost of achieving so is expensive. We know of industry-centric funds, geography-centric funds, and thematic funds. But we may not be cognisant of a perfect mash of all these three in any fund available in the market. We may not have the luxury of truly diversifying our risks. Each ETF we choose to buy comes at a cost at each transaction and we may not be able to dollar cost average our way through without incurring diversification costs that erodes our returns.

A balance must be struck between the downside protection benefits of diversification and the monetary costs of diversification. Let me know what your preferred investing strategy is or alternatively let’s have a chat on how to best achieve that balance!

If you're interested to chat on this topic or to exchange ideas, please feel free to drop me a message on Telegram @elijah2212 or through email elijah.thj@gmail.com!