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Don’t Put All Your Eggs In One Basket

Have you ever wondered where this saying originated?  I have!  This pearl of wisdom conjures up the image of a farmer harvesting eggs from his prize hens to take to market, plopping the delicate eggs in a basket, only to misplace the basket, have it stolen, or eaten by a sly fox.  The end result, however, is all the same….no eggs, no immediate economic benefit, no future assets (hens), no money.

Miguel de Cervantes Saavedra, a Spanish novelist, actually coined the popular proverb  in 1605 in Part I of Don Quixote.  His version: “It is the part of a wise man to keep himself to-day for to-morrow, and not to venture all his eggs in one basket”.

This most practical message is that it is prudent for men and women to reduce their risk in their endeavors, whether it be hiking in the mountains, driving to work, searching for a job, or investing in money making opportunities.  Ah yes…investing.  Ask any investor who decided to put all their money in high flying tech stocks in March 2000 what they think now about reducing their risk through diversification.  First, they will tell you that their portfolio has been reduced significantly and that they have fewer assets to diversify.  Second, they will tell you that diversification of investable assets is a wise thing.

Modern Portfolio Theory (MPT) is the technical finance theory equivalent to Don’t Put All Your Eggs In One Basket.  Harry Markowitz developed portfolio theory and in 1990, earned the Nobel Prize for his contribution to financial economics.

MPT assumes that most people are risk averse, want high returns, and guaranteed outcomes.  For example, given two investment choices offering the same return, most people will choose the investment that has the lowest risk.  Furthermore, the theory espouses prudent diversification of investments as a means to reduce risk.  By combining different asset classes or individual investments that do not move in tandem with the market or each other, one can significantly reduce risk. 

While MPT has its share of naysayers, there are studies that demonstrate that prudent diversification and asset allocation are responsible for 90 to 95% of your portfolio returns.  This implies that only 5 to 10% of your portfolio performance is due to timing the market and individual stock picking.  But never mind the naysayers, diversification really is practical.

So remember……Don’t put all your eggs in one basket!

Written by William E Haynes, III & James H. Barker, Jr., Managing Directors of Haynes Barker Investment Management, LLC., a boutique firm that specializes in portfolio management and analysis, financial planning, & wealth transfer strategies.  Securities are offered through Linsco/Private Ledger, Member of NASD/SIPC.