Based on our blog ‘7 Rules Of A Smart Fund Manager (That Everyone Should Follow)’, we’re running a week long series spending a little more time with each rule, so you can easily digest each and every tidbit! #SharingIsCaring
To use another clichéd phrase, ‘Don’t put all your eggs in one basket.’ Professionals know the importance of diversification when deciding which assets to invest in. Asset allocation is a fundamental component of their investment strategy. Whether considering large-cap/mid-cap/small-cap stocks, tech/pharma/banking/auto stocks, government securities, corporate debt or the like, a fund manager knows why, where and how each kind of asset fits into their overall investment strategy. They do this to spread their risk, so that the rise and fall of their portfolio isn’t determined by a small handful of holdings.
The same should be true for us. Sure, we can choose to put all our money in ‘safe’ investments, like FDs, or a PF, or (heaven-forbid!) money-back insurance policies, if we want to minimize risk. Or we can invest our life savings in that one hot stock that we heard about on TV. But we should not be surprised when results don’t measure up to our lofty expectations. We may end up dissatisfied with the ‘safe’ returns 10-20 years from today, or recoil in horror as the hot stock nosedives.
We must diversify our investments and choose a sensible asset allocation in accordance with our financial goal.