Why you shouldn’t put all your eggs in one basket

You’ve probably heard the saying. It’s actually centuries old, but it still sums up one of the most useful ideas in investing. 

Markets rise and fall. Some investments perform well while others don’t. Diversification is about making sure your entire financial future isn’t leaning on any single investment, sector or market to carry it.

So let’s unpack what it really means, and why it matters for your own portfolio. 

Diversification isn’t “owning more investments”

A common misconception is that diversification means owning lots of different investments. But it’s not about quantity. 

Imagine owning shares in ten different companies, but they’re all New Zealand banks. Technically, you own ten investments. In reality, you’re heavily exposed to one sector and largely the same economic forces. For this scenario, if the banking sector struggles, the value of all ten investments could feel the impact at the same time. 

True diversification means spreading your money across assets that aren’t all likely to react to the same events in the same way.

Different investments behave differently

Every type of investment has its own strengths, risks and “personality”.

Shares, for example, have historically offered higher long-term growth potential, but they can swing around more in the short term. Bonds are generally considered more defensive and may help cushion a portfolio when markets get choppy. Property, cash and other asset types each play their own role too.

It’s unlikely that every investment performs well all the time. But by combining investments that tend to behave differently under different conditions, you can help reduce the impact of any single one having a bad run.

Concentration can hide in plain sight

Even investors who think they’re diversified can end up more concentrated than they realise. 

Recently, analysts started pointing out that the top ten companies in the US S&P 500 – many of them large AI and technology names – now make up close to 40% of the entire index.⁽¹⁾ A decade ago, that figure was closer to 18%. 

If you own a passive fund tracking that index, you might assume you’re spread across 500 different companies. In practice, a big chunk of your money could be riding on a handful of them. And if those companies underperformed, it could have a meaningful impact on overall index returns. 

None of this means index funds or share portfolios are a bad idea. It just means it’s worth understanding what you actually own.

It goes beyond asset classes

Diversification doesn’t stop at choosing different types of investments. It can also mean spreading your money across:

• different industries
• different company sizes
• different countries and regions
• different currencies. 

Think about it this way. New Zealand represents only a small slice of the global economy. By investing internationally as well as locally, you’re accessing a much broader range of businesses, industries and growth opportunities, while reducing how much your outcomes depend on any one country’s economy.

You can’t eliminate risk (and that’s okay)

Another big misconception about diversification is that it prevents losses. It doesn’t. 

When markets experience broad downturns, many different investment types can fall at the same time. Diversification can’t eliminate investment risk altogether, nor can it guarantee positive returns.

What it can do – and it’s worth repeating – is reduce the impact of any one investment, company, sector or region performing poorly. Rather than all your investments moving in the same direction for the same reasons, a diversified portfolio is designed to spread that risk more evenly.

In other words, diversification doesn’t mean avoiding every bump in the road. It means making the journey a little smoother. 

The right mix depends on you

There’s no such thing as a “perfect” diversified portfolio. The right mix for you depends on your goals, investment timeframe, attitude to risk and personal circumstances. 

Someone investing for retirement in 30 years’ time may be comfortable taking on a different level of risk than someone planning to use their money within the next five years. Neither approach is right or wrong, they’re just designed for different journeys. 

Diversification should always support your objectives. Not someone else’s.

Focus on the long term

When it comes to investing, yesterday’s winners aren’t guaranteed to be tomorrow’s. 

A well-diversified portfolio can help reduce the temptation to chase short-term performance, and encourages a more disciplined, long-term approach instead. 

It’s not a “set and forget” exercise

Just like anything else in your financial life, diversification should keep pace with your circumstances, goals and the world around you.  

That’s why portfolios generally need to be reviewed and rebalanced from time to time. Rebalancing simply means adjusting your investments to bring them back in line with your long-term strategy, helping ensure your portfolio continues to reflect your goals and tolerance for risk. 

Need help building a diversified portfolio?

Get in touch. An Invest Link adviser will focus on who you are and what you’re looking to achieve, while making sure every investment plays a clear role within a broader strategy. 

Source: VanEck – S&P 500 Concentration Risk: What to Know Now

Disclaimer: The information provided in this article is intended for general informational purposes only and does not constitute financial advice. Every individual’s financial situation is unique, and financial decisions should be made based on your specific circumstances and goals. We recommend consulting with a qualified financial adviser before making any investment, insurance, or mortgage-related decisions. 

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