Diversification: don’t put all your eggs in one basket

What is it all about?

Diversification is a simple rule: rather than investing all your money in a single share (a stake in a company), you spread it across several different investments.

Imagine you have 1 000 € to invest. You could put it all into shares in a single company. But if that company runs into difficulties, you stand to lose a great deal. If you spread your 1 000 € across 10 different shares (100 € each), a fall in the market will have a much smaller impact on your portfolio (that is, your investments as a whole).

It’s the well-known proverb: ‘Don’t put all your eggs in one basket.’ If the basket falls, all the eggs will break. With several baskets, you’ll at least save a few.

How can we diversify in practice?

There are several ways to diversify. The simplest option for a beginner is to invest in funds (managed portfolios that already contain dozens or hundreds of shares). A single fund offers you instant diversification.

You can also diversify by sector: instead of buying 5 shares in banks, buy 2 shares in banks, 2 in technology and 1 in healthcare. Not all sectors react in the same way to economic changes.

Finally, diversify geographically: invest in French, European and global companies. If the French economy slows down, your global investments can help to offset this.

A beginner can also combine: a fund (automatic diversification) + a few individual shares (to learn). That’s more than enough to get started.

What is the right level of diversification?

You might be wondering: how many different investments do you need? There’s no magic number, but here’s a simple guide.

With 5 to 10 different investments, you’re already significantly reducing the risk. Once you exceed 20 or 30, you start to ‘over-diversify’: the gain in security becomes minimal, and you waste time managing them.

For a beginner with limited funds (less than 5 000 €), one or two funds are enough. They already contain hundreds of shares. For larger sums, you can add a few individual shares.

The limits of diversification

Please note: diversification reduces risk, but does not eliminate it. In the event of a major economic crisis, all markets may fall together. Your diversified portfolio will also fall, but by less than a concentrated portfolio.

Another pitfall: diversification is no excuse for ignoring your investments. Even if you have 10 investments, you need to monitor them regularly and understand what you own.

Finally, diversifying too much can dilute your returns: if one of your investments rises significantly, it will have little impact on your overall portfolio (as you have only invested a small amount in it).