“The only free lunch is spreading” is a common saying in the investment world. This means in short that you can optimise your portfolio by spreading your investments. The key message of spreading is that you shouldn’t put all your eggs in one basket. I explain it very easily: If I invest only in BASF then my full risk is dependent on only one stock. If the BASF stock goes down then my portfolio immediately also goes down. And of course vice versa if it goes up.
In the history we have seen too many examples of investors ignoring diversification of their portfolio. For example in the US many people invested all their money in Enron, even worked there and put their retirement funds only in Enron. We all know what happened to Enron: the company got bust due to big frauds so all investors lost all of their money. The same also happened in Belgium where many investors put all of their money in stocks from Dexia and Fortis. Of course they can defend their choices they made by claiming that the banks had high ratings, paid huge dividends, had higher revenues and profits etcetera.
But in the end every company can go bankrupt and I am very sure also in the future we will see these kind of totally not diversificated portfolios with catastrophic results unfortunately.
But how to diversify? The answer for this is not that easy. Maybe too many reports have been written about this asset allocation subject.
Of course you should diversify your stock portfolio but you should also diversify your total portfolio by also investing in bonds and in cash. As a rule of thumb many people say that the percentage of stocks in your portfolio should be equal to 100% minus your age. So a person of 50 should only 50% of his wealth in stocks and the rest in lower risk investments like cash and bonds (preferably government bonds).
In another video we elaborate more about asset allocation. Video done by Tim van Thienen (Spiegelbeelden.nl) and Denise Lindemann (YesInvest media).