Why you need to spread your money around

You’ve probably heard the term ‘don’t put all your eggs in one basket’ before. What does it mean and why am I talking about it? If you’re new to investing you might be slightly confused. Here’s where I’m going with this: if you put all your eggs (i.e. all your money or investments) into one basket (say, the agriculture sector) then you’re at risk because if a clumsy hen tips over your basket (or there’s a calamitous agriculture sector market crash) then all of your eggs are smashed (all your money is gone) and in both scenarios, you have nothing with which to make delicious omelettes because your eggs are kaput and you’re broke.

Make sense? Uh, yeah, I guess you still don’t know where I’m going with this. Here’s the thing. If you’re a new investor and have just put your money into the market but might not know a tonne about what you’re supposed to do with it, there’s an important factor to take into consideration. Don’t put all your investment eggs in one basket. Make sure your money is spread out across various sectors and different types of investment products to make sure you’re comfortable with the risk you’re taking on.

Here’s another fact about if you’re a new investor in Canada. You’re probably woefully overexposed to the Canadian stock market. You might be in mutual funds that invest in Canadian stocks. Or ETFs that follow Canadian-based indices. And if you’re enrolled in a workplace pension plan or a stock plan, boy, forget about it. Most of your precious eggs are in the warm, cozy and seemingly safe Canadian basket. We invest in what we know, and while sometimes it can get us in trouble, like when Canada’s oil sector crashed a few years ago, for the most part it means that you’re missing out on better returns elsewhere.

Canada’s market is minuscule when it comes to the global markets. You say you’re investing in THE stock market. But the Canadian market makes up about 4 percent of the global stock market. So if 75% of your investments are in Canadian-focused stocks or products, then you’re shunning the sweet, sweet returns that can be found in emerging markets, for example.

Now, what can you, a young, newbie investor, a stumbling chick who for some reason has tons of eggs to spread out across baskets, do?

Bottomline, you set yourself up for stronger returns. And, even more important, you set yourself up for less RISK.

Article courtesy MoneySense