Holland Hahn & Wills. Why diversification is key

If your wealth is highly concentrated in any one individual stock, take this opportunity to learn an important lesson: While many people think they know more than other investors, we do not know more than the market.

Diversification is key, and is the practice of spreading investments across a variety of assets. It’s a time-tested strategy to mitigate risk. Children learn about it early in life with the phrase “Don’t put all your eggs in one basket,” but all too often, grown-up investors forget. It’s generally safe to assume that the total value of the stock market will not go to zero. But the same cannot be said about any individual stock, no matter how promising the future of a company might seem. Why not? Because we cannot predict the future. The current price of any stock reflects the value of all its future income streams, but it’s no guarantee. Some companies fail. Can anyone predict which ones? Fortunately, there’s no need to. You can have a positive investment experience without knowing what’s going to happen with any individual stock because of diversification. In investing, diversification is the closest thing any of us can have to a free lunch.

Nearly all investing horror stories start with a simple fact: Someone took too much risk. But investors don’t have to. Everyone who invests in the stock market should prioritize diversification in their portfolio.

It could be argued that when you concentrate your wealth in single stocks, you’re gambling, not investing. And that’s fine, as long as you don’t mind losing what you bet.

For a second opinion or more details call Holland Hahn & Wills Financial Planning: 020 8943 9229 | enquiry@hhw-uk.com | hhw-uk.com

This article is for information purposes and should not be treated as advice. Individual circumstances should always be considered prior to purchasing any financial products. Investing involves risk – the value of investments and income from them may fall as well as rise and is not guaranteed.