Diversification: is “don’t put all your eggs in one basket” enough?

by | Jan 17, 2019 | General | 0 comments

You have probably heard this before. In order to reduce risks, you should not put all your eggs in one basket. This usually means that you should diversify your investments, for example by choosing 10-20 stocks from different industries/sectors instead of concentrating all your capital into a few correlated stocks.

Now imagine this scenario. You log in to your brokerage platform and you check the performance of your well-diversified portfolio. Everything seems fine, you feel confident, you are sure that you are well placed on the way to your financial freedom. Hence, you go sleeping without any fear. Does it sound familiar? Probably.

Suppose that the following day, when you log in again to check your portfolio, for some reason the platform does not work. Ok, you say, sometimes there are technical issues. No worries. The same happens for the next few days. No worries, you say, it happens, but let me write to my broker to check. No reply. So you start to worry now, you check online and you find scary news saying that your broker went bankrupt. Your first reaction is panic, but then you remember that the broker was regulated, so you should get your money back. Maybe, but when? And the whole amount?

This scenario can happen. Actually, it recently happened with a regulated Australian broker (I will not mention the name but you can easily find it online). So what is the lesson to learn here? Diversification is important, but you should not just consider diversifying your investments. A better option is also to diversify by choosing multiple brokers. This way, even if one will go bankrupt, your whole capital will not be affected. As a matter of fact, it is much more unlikely that all the brokers will go bankrupt. The same apply to the banks.

Hence, yes. You should not put all your eggs in one basket. At the same time, you should also not use the same brand for all your baskets!