The Eggs and The Basket
One of the most popular pieces of advice for beginners when it comes to investing is to diversify; to spread your eggs across several baskets. The idea is that if one basket is lost, you don’t lose all your eggs. There’s some initial appeal to this approach; if you don’t think about it too deeply, it has a certain surface-level logic. However, it’s just a complete nonsense statement when you dig deeper.
What is the basket?
The major problem with this belief is that the basket is not satisfactorily defined. The basket could be a single cash savings account. It could be having all your investments under one banking company, or holding all your stock market investments in a single stock. It could be investing in just one sector, country, or continent, or only investing in assets with an “x” in their name. You could argue that keeping all your eggs in a single basket is sensible if you choose the right basket. As Andrew Carnegie said;
“Put all your eggs in one basket, and then watch that basket.”
I would argue that a better version of the statement would be;
“Don’t fill your basket with one type of egg.”
This is the beauty of global index fund investing. You have one basket to watch; the fund. Within that basket the eggs come from a selection of different types; in other words, you have stocks from different industries, different countries, and different currencies. The diversification is in the eggs, and not the baskets.
Another advantage to this approach is that it takes the mental strain of having another thing to worry about. You don’t have to monitor different asset types, spreading your attention across a range of investments. It allows you to focus on a single path to wealth, or as JL Collins titled his book, The Simple Path to Wealth.
Successful investing that leads to long-term wealth is not exciting or flashy. Serious investing is all about the process and sticking to that process month after month, year after year, and possibly decade after decade. For some people, this is not enough and boredom can seep in, tempting investors to gamble on risky ventures that offer higher, and ultimately unrealistic and unsustainable, returns. This is why you have to find the fun somewhere.
Finding The Fun
There are lots of ways to find fun investing. You can connect with other investors and share tips and horror stories. I get a lot of entertainment out of investment-related memes. You can also set yourself milestones at which you reward yourself with that thing you’ve always wanted, whether it’s a new game for your computer, a new book, or a takeaway and a movie. Keeping track of your investing and looking back at how your wealth has built over time can also be a huge source of motivation.
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I say it everytime, but great blog as always! Your advice is always so well thought out and the way you explain it is so helpful, I hope your readers all ‘see the light’.
Fantastic accomplishments so far in your FIRE journey, thank you again for keeping us in the loop and taking the time to offer and explain your insight and advice. Keep it up! 💪🏻
Thank you for reading and your kind words 🙂
To say that it’s superficial and “complete nonsense” is a tad hyperbolic and dismissive. Absolutely, a global index fund is widely diversified but there is still a small risk that the fund could go bust due to internal fraud, incompetence, etc. Think Woodford Equity Income Fund – not a global index fund but still it was diversified across a range of income-producing equity investments.
Hi, and thank you for reading and taking time to comment. I think there are a couple of issues with what you are saying. First of all, we need to define what we mean by “risk”. Are we talking the risk of losing all your money? Not getting inflation beating returns? Are we talking about churn within the fund? Risk can never be completely eliminated; there’s always going to be risk in everything we do. The key is risk mitigation.
I’m confused by the comparison to the WEIF, because, as even you state, it was not the same type of fund as a global index tracker. The main problem with the WEIF was it was illiquid; people were demanding their money at a rate the fund could not keep up with. Now, compare the biggest holdings in the two funds I invest in, and the major holdings for fund one are; Shell, Astrazenexa, Unilever. HSBC, BP, Diageo and a few others. For fund two we are talking about Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, Tesla.
Comparing an index tracker and the WEIF makes no sense. As a friend of mine said, “It’s like saying the Argentinan Peso is on its arse, therefore the Euro is stuffed too. Same thing, but different.”
Hi David
I was quite clear about the type of risk, so not sure why you had an issue with that: “a small risk that the fund could go bust due to internal fraud, incompetence, etc“. As a corollary, such risks aren’t specific to the type of investment fund (index tracker, equity income, ITs of all types, and so on). All it takes is one dodgy employee who finds/chances upon a flaw in the internal system that can be exploited to put the fund into difficulty. I cited the example of Woodford merely to demonstrate how management can inadvertently cause a fund to collapse, in that case by virtue of carrying too many illiquid assets (they invested in liquid ones too but evidently not enough to keep the fund’s cashflow alive when needed).
To be clear, I invest in index trackers, but I put my eggs in various baskets i.e. several funds across several platforms. I think the risks are extremely low but they can never be entirely discounted.
Hello! Dodgy employees or fraud can take place anywhere, at any time. If you take a company like Vanguard, and how they are structured, it would take something crazy happening to lose all your money. One of the major problems with investment funds is that people don’t spend enough time looking under the hood, and seeing what the fund is actually invested in. There is risk everywhere, but it feels as though you’re picking the lowest risk option and saying it still has risk. If that is what you are saying, then I agree. I think that diversifying across too many different funds and/or platforms increases the chance that something will go wrong, hence my opinion that it’s best to invest in as few things as possible, and making sure you understand that investment as much as possible. Investing is all about opinions, and emotion is a massive part of it. You have to believe in what you are doing.
Again, thank you for taking the time to read the blog and post your comments and thoughts; it makes for an interesting discussion.
I’ve always considered the saying about putting all your eggs in one basket from the perspective of a farmer selling eggs at the market, with the eggs being essentially currency in the saying.
I personally have all my eggs in 1 basket, a widely diversified fund, with this 1 fund meeting all my needs, although as I do get closer to FI I’ll bring in a second fund to reduce volatility.
Personally I’m 100% equities and see my income as the “bond” allocation, but when I approach FI I’ll add in a slug of bonds.
Hi David,
I think you and I are in agreement albeit that we express and view these things in a somewhat different way. 🙂
…you’re picking the lowest risk option and saying it still has risk. If that is what you are saying, then I agree.
100%. I guess it’s the lowest risk but, you know…unknown unknowns and all that. When things like Enron, Barings Bank and Woodford happen (i.e. disasters in the corporate/financial sphere), it comes as a surprise to most. Black swans ain’t so rare.
I made the decision, partly driven by FCSC compensation limits, to diversify across two broker platforms. But I also decided to switch to a different index fund (from another provider) too. The biggest gain is by splitting across two platforms/providers. Beyond that it’s diminishing gains and, from my point of view, becomes ever more complicated to track and manage. Which you’ve effectively hit upon: “…that diversifying across too many different funds and/or platforms increases the chance that something will go wrong, hence my opinion that it’s best to invest in as few things as possible“.
The point is here, for me, is that if (extremely unlikely as it is) one of the funds hits a problem, I’m not completely wiped out. Broker failure is less of an issue…you still have your fund investment held in a client account (hopefully) but it takes 6-12 months for the regulator to unwind the mess and transfer your holdings to a new platform…in which time you the funds are effectively unavailable. As I’m close to drawdown, this would be an issue.
All the best! 🙂