Money Matters with Nimi

There are several stories attributed to the origins of the term “don’t put all your eggs in one basket”. The phrase is often attributed to Miguel Cervantes, a contemporary of Shakespeare. In its contemporary context, it refers to the concept of diversification as an investment strategy and the fact if you put all of your money in one investment, your return will depend solely on the performance of that investment. Thus if the investment performs badly, your investment is at risk.

Investment diversification

Diversification can significantly reduce investment risk. By diversifying across the various asset classes such as cash and fixed income securities, stocks, and real estate, you can reduce the risk of market volatility as they all perform differently. Stocks, generally offer the highest returns among these three classes, but they also carry the highest risk of loss. Bonds may not be as lucrative, but they offer more stability than stocks. Money-market returns are usually low, and your savings may not even keep pace with inflation, but your investment is relatively secure. Real estate also forms another asset class.

In addition to diversifying among the different asset classes, consider diversification within them. An asset-allocation strategy looks at your particular goals and circumstances and determines the most appropriate mix for you. Your risk appetite, your personal wealth and income needs, your age and time horizon, your financial goals will help you determine how much you should have in each asset category.

General rules for asset allocation suggest that any money you need next year should be in cash, money you need in two to three years in fixed-income investments, and any money you don’t need in four to five years and beyond should be invested in the stock market. This ensures that the cash you need today is ready to be spent, the money you need in a few years will be safe from stock market volatility, and money you need several years from now can be invested in the stock market for long term growth.

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