The basic idea is that we can’t predict the future, so we don’t know which investments will do well and which will do badly.
If you have all or most of your money in one share or asset class, you will do very well if you are lucky and very badly if you are unlucky. For most people, being unlucky would be disastrous as they would lose all their savings. Because of this, the chance of being lucky and doing well is not worth the risk of doing badly.
We can avoid the risk of losing everything by diversifying: spreading our investments over different asset classes, regions, or even currencies. We probably won’t do as well as the person who got lucky with one share, but we are unlikely to lose everything.
The main asset classes we will be looking at on this blog are:
- cash
- property
- shares
- bonds
There are of course many other assets you can own, but the four above are probably the most versatile. We’ll be examining them in detail in future blog posts.
For now, just remember that you really don’t want all your eggs in one basket. The more baskets you have, the more likely most of your investments will be there when you need them.