#coronacrisis Part 4: Don't put all your Easter eggs in one basket.
Updated: Aug 22, 2020
WTF is this blog about!?
I think we can all agree that the #coronavirus was unexpected - just like this dog going on a mad one - which teaches us just how important it is to diversify our investments.
But what is diversification and how can I diversify my investments?
What is investing?
Let's go back to basics, in it's simplest form, investing means buying shares in a company in the hope that they will increase in value so that you can make money. A good investment involves buying shares at a low price and selling them at a higher price. But how does this work in practice?
If you're lucky enough to have purchased shares in Zoom (a video conference company that's absolutely crushing it rn due to the current mass WFH sitch), you're laughing! Share prices have increased by around 115% (from 31 Dec 2019 - 31 March 2020) i.e. if you had bought £100 worth of Zoom shares last year, you'd now have £215!
Those of you with shares in Apple are less lucky: disruptions to their production lines has resulted in a 13% fall in value (from 31 Dec 2019 - 31 March 2020) i.e. if you had bought £100 worth of Apple shares last year, you'd now have £87.
My point is, Apple is a large, stable company and I'm sure pretty much everyone would have been comfortable putting their money in the Apple basket last year. But, putting all of your money in the Apple basket (or any basket for that matter) is a bad idea, because unexpected things (like that dog, or the Coronavirus) can come along, causing you to drop your basket and loose all of your eggs. And this is why you should diversify your investments.
What is diversification?
Diversification means splitting your eggs across multiple baskets, so if you drop one, you're not left egg-less.
I know what you're thinking: 'how TF am I meant to carry multiple baskets; I've only got 2 hands!?' - that's where funds come in.
Rather than picking an individual company (such as Zoom or Apple), you can put your money in a fund, which invests across hundreds (or even thousands) of companies for you. This lowers the risk of your investment since you're not relying on a single business to perform well.
How does investing in a fund lower my risk?
Investing in a fund gives you exposure to multiple areas, so if something bad happens in one of them (i.e. travel restrictions are having a negative impact on airline companies), you won't loose all of your money because you'll also be invested in other areas (such as companies that produce face masks).
Whilst investing in a single company can provide very high returns, it also comes with a hell of a lot of risk. Investing in a fund allows you to spread your money across a large number of companies, providing exposure to multiple areas and reducing your reliance on any single company, industry, country etc.
To truly diversify your investments, you should be investing across multiple funds and the easiest way to do this is through a ready-made Stocks & Shares ISA. I personally use Nutmeg to manage by ISA and by using this link you won't have to pay any management fees for 6-months (I'll also get a small reward, so it's a win-win!).
Now for the serious part: my blogs are for educational purposes only; they do not constitute financial advice. Please consult with an independent financial advisor for advice on your specific circumstances.