Investing: Why You Should Diversify



So far, we’ve been telling you what not to do when investing. Here’s what you should do: diversify. Don’t put all your eggs in one basket. Definitely, don’t put your investment money solely in your employer’s stock. That’s very loyal, but it’s a terrible strategy. Just think of Enron’s employees. They had huge chunks of their retirement funds in company stock. Upon Enron’s collapse, many employees who were once multimillionaires ended up with almost nothing. As you can see, diversification is much safer. Diversification reduces risk by spreading your investment across different assets, doing so without reducing potential returns. Plus, modern financial markets make diversification easy. For example, our favorite investment instrument is the low-fee index fund. These funds mimic a large market basket of stocks, like the S&P 500. The sheer variety in the fund is what mitigates the risk. It’s diversification for the win. A quick reminder, though. Choose an index fund with low fees. Fees may seem trivial, until you watch them eat away at your investment. Imagine this: take a hypothetical $10,000. Invest that in a fund with a 1% fee, and you’ll have roughly $57.5K after 25 years, assuming an average 8% return. Now, invest the same $10K, in a fund with a 0.2% fee.You’ll get roughly $70K over the same quarter-century. Our point is—when it comes to investing, simple is best. So for example, if your employer offers a 401K, take the offer! That being said, you might believe that the market is irrational. Anomalous, even. No worries. Next time, we’ll tackle behavioral finance to see if you can profit from anomalies, and irrationality. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Money Skills Course: http://bit.ly/2aZfRvy Macroeconomics Course: http://bit.ly/2bvVXXM Ask a question about the video: http://bit.ly/2bG7iVm Next video: http://bit.ly/2bT3MYT

Comments

  1. ive invested in property thus far...but I'm worried about interest rates going up,,,so I might just pay off my mortgage then buy some stocks next
  2. It's just like Risk. Don't put all your defense on one front, or you'll get rekt.
    In the market don't invest heavily in one stock or you'll get rekt.
  3. You say that there is no cost to diversifying, but doesn't diversifying mean that there is less chance of my investment growing at an unusually high rate?
  4. maybe you should kill your self
  5. I don't understand the answer to practice question 1
  6. gbcz
  7. Completely wrong!

    While it's true that it's not reasonably possible to get rich quick in the stock market, it is extraordinarily easy to beat the market.

    The secret is to buy dividend stocks and/or share buy-back stocks during market corrections, while avoiding obvious losers that have major financial problems.

    You won't get rich quick with this strategy, and you will have losers from time to time, and you will occasionally not beat the market. But the gains over 30 years will be at least triple the gains produced by the market/index funds.
  8. i didn't get the first questing.

    Oil firm, Airline firm or Solar firm.

    choose any 2 for investment Diversification strategy?
  9. One form of diversification is by tax structure: Traditional 401k/IRA vs the Roth variety vs. Taxable. While I agree that company stock should not be included in tax protected accounts, I do believe such a holding has a place in a Taxable account. I'm specifically referring to ESPP. These have a build in 15% advantage at purchase ( at either the start or end of the subject quarter, whichever is lower) and are a good avenue for harvesting tax losses to offset capital gains from other taxable holdings.
    No need to go nuts on these, but they are a perk that is often ignored.


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