Don't put all your money on one stock, one platform or one house
- High value
- Evidence B
- Saves money
- Free
- Takes minutes
- Some willpower
In plain words
As long as several things don't all rise and fall together, spreading your money out leaves the average amount you can earn unchanged, while the ups and downs of your account get smaller. Conversely, if all your money is on one stock, one platform or one house, when it has trouble, you have trouble with everything.
- Cost
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Free. The hard part is accepting that you will not happen to pick the one that earns the most.
- What you get
-
As long as several assets don't all rise and fall together, spreading money across them leaves the expected return (the average you can earn) unchanged, while volatility (the ups and downs of the account) is smaller. This is the basic conclusion of portfolio selection that Markowitz put forward in 1952, and it has been used for decades since. Conversely, if all your money is in one stock or one platform, its variance is all of your variance, and you rise and fall as much as it does. When something goes wrong there is no hedge, and no other asset to help make it up
- Notes
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Rated B because that classic paper is a purely mathematical derivation and does not work out an actual figure for "how much less you lose by spreading out." Spreading out only makes the account's ups and downs smaller, and does not guarantee you won't lose. Buying a broad index fund (see §5.17) is itself the easiest way to spread out. This is not investment advice.
- Evidence grade
- B : Supported by research but without a precise number, or based on small or single studies.
- Sources
-
- Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x
Mentioned in
- Sell stocks that have lost money by a rule you set in advance, and don't count on averaging down to turn things around
- To buy overseas assets such as U.S. stocks, go through a QDII fund (QDII基金) or Stock Connect to Hong Kong (港股通); don't open an account at an overseas broker, and don't use your annual foreign exchange quota to buy
Translated from the Chinese original. Original book, section 5, tip 19. This section is about money and spending. It is general information, not financial or investment advice. Content may be out of date and rules differ by place. When you actually deal with an agency, a doctor or a court, follow what local officials, doctors and lawyers tell you. Disclaimer