Diversification: Why you shouldn't put all your eggs in one basket

As Easter approaches, we're reminded of the timeless advice: "Don't put all your eggs in one basket."

While it's helpful for chocolate treats, it's even more critical when investing.

Recent market volatility, sparked by Trump's renewed tariff threats, highlights how unpredictable markets can be.

Just like you wouldn't risk your Easter eggs in one basket, it's essential not to place all your money into one asset. Diversification is key to reducing risk and ensuring your portfolio is prepared for all market conditions.

In the world of investing, diversification means spreading your money across different assets, sectors, and regions to reduce risk.

If one egg cracks, you've still got others to fall back on. When it comes to diversifying, exchange traded funds (ETFs) are a brilliant tool that provides access in investment portfolios.

Building a diversified portfolio with ETFs

ETFs work much like a well-stocked Easter basket, offering exposure to a variety of assets.

When you buy an ETF, you're buying a basket of investments, from shares and bonds to commodities.

Instead of focusing on one stock or sector, ETFs help you spread your risk across multiple investments.

For example, if you invest in an Australian shares ETF, you gain access to hundreds of companies across various industries. If one sector underperforms, others might still perform well, helping to cushion the impact.

ETFs also provide easy access to international markets. It makes sense not to rely on just one country when investing, as countries often go through different sea changes of outperformance.

This global diversification helps protect against the risks of being overly exposed to one economy.

ETFs make it easy to invest globally, whether it's the US, Europe, or emerging markets like China.

This kind of global mix can help smooth out bumps when one market falls behind. For example, while US shares have struggled this year, Europe and China have done better, and ETFs let you tap into that with just one click of the button.

Gaining exposure to a range of asset classes

One of the major benefits of ETFs is their ability to provide exposure to multiple types of investments.

There's more to investing than just shares. For instance, bond ETFs let you invest in government or corporate bonds, providing stability and income, while commodity ETFs give you access to precious metals like gold.

Adding different asset classes to a portfolio strengthens diversification because they don't always move in the same direction - a concept known as correlation. Gold is a classic example of an asset that has a low correlation to shares, as it often rises when shares fall.

So far this year, while many global share markets have dipped into bear market territory (meaning a fall of over 20%), gold has hit record highs as investors seek safety during times of uncertainty.

Having stocks, bonds and commodities in your portfolio ensures that you're not reliant on one asset class alone, just like balancing your Easter basket with a range of different chocolate eggs and non-chocolate treats too.

ETFs also allow you to manage risk while still taking advantage of potential growth. Whether the market is up or down, a diversified portfolio built with ETFs will be more resilient than a single investment.

In times of uncertainty, ETFs can serve as the safety net your portfolio needs, just like the Easter bunny hiding a few extra eggs for good measure.

The benefits of ETFs: Liquidity and cost-effectiveness

Much like how chocolate eggs are easy to share around with loved ones, ETFs are incredibly liquid, meaning you can buy and sell them easily on the stock exchange.

This flexibility gives you control over your investments, whether you want to take advantage of market movements or need access to cash quickly to top up those easter treats.

Unlike traditional managed funds, which are only priced once a day, ETFs are traded throughout the day, allowing you to get accurate real-time pricing.

Another sweet advantage of ETFs? Low fees. Unlike traditional managed funds, which generally have higher costs, ETFs are more affordable, meaning more of your returns stay in your basket.

Think of high fees like termites nibbling away at your nest egg, while ETFs let your investments grow without as many bites taken out. Over time, those savings add up.

Investing for what really matters

As you savour your Easter chocolates, it's a timely reminder that variety isn't just sweet, it's smart.

Just like a well-filled Easter basket has a mix of treats, a strong investment portfolio needs a healthy spread across asset classes, sectors, and regions.

Diversification helps soften the bumps when markets get rocky, and ETFs make it easier than ever to access that mix without the extra cost or complexity.

Putting all your eggs in one basket might work in the short-term, but over the long-run, it's a risky strategy.

Diversification is often called the only free lunch in investing, and for good reason. It helps smooth the ride, manage risk, and set you up for more consistent returns over time.

Smart investing is not about chasing the next shiny easter egg. It's about building a portfolio that can handle all market conditions.

Ultimately, the goal isn't just aiming for higher returns, it's freedom.

The freedom to enjoy Easter lunch without checking the markets because you know your portfolio has you covered. The freedom to spend more time with the people who matter, doing what you love, for as long as you like.

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