You've heard it before, "you'd be crazy to put all your eggs in one basket!" Let's walk through another way to think about diversification, and it isn’t just about eggs but having everything else in the farm too!
The Farmer's Diversification
Put yourself into the boots of an everyday farmer. A smart farmer wouldn't just raise chickens. They'd also have cows, grow tomatoes and potatoes, keep sheep, and maybe plant grains. This mix ensures that if a flood wipes out the vegetable and grain production one season, other areas of the farm can still thrive to keep the farm going and growing.
Thinking Bigger: The Power of Many
Now, imagine not just one farm but a network of farms. If 10,000 farmers from all over New Zealand pooled their resources and shared profits, the impact of a single farm's bad season would be minimal. If one farm has a bad season, the loss to the whole is just a tiny, tiny proportion of the whole. If the farmers are expecting a decent investment return, that loss is a drop in the bucket.
Of course, this isn’t a new strategy, after all, this is kind of what Fonterra does in farming!
Applying the Farm Strategy to Your Investments
Diversifying your investment portfolio works the same way. By mixing assets like bonds, shares, and property, you protect yourself. When one market hits a rough patch (like shares dropping), another (like bonds) often does well, balancing things out. This makes your investment journey smoother and much less stressful than going all in on one type of investment.
So, think of diversification as creating a balanced, resilient farm—one that can weather any storm!
Note: While you've heard the farmer example here, it’s still true that farmers can be heavily affected by widespread weather events. When it comes to your investments, it’s can be wise to diversify globally.
