What is the Meaning of Don't Put All of Your Eggs in One Basket?

A Simple Lesson in Diversification

eggs in basket
Don't put all your eggs in one basket!. Getty Images

You may have heard the old saying, "Don't put all your eggs in one basket." But what does it mean and how does one apply it to mutual funds?

When it comes to investing, putting your eggs in one basket is the equivalent of putting all of your savings into just one stock, mutual fund or non-diversified investment type.

Diversification With Mutual Funds

Diversification with mutual funds is more than just putting your eggs into different baskets.

Many investors make the mistake of thinking that spreading money among several mutual funds means they have an adequately diversified portfolio. However, different does not mean diverse.

In my advisory practice, I see new clients come to me with a portfolio of several funds but many of them have similar objectives. For example, any random Large-cap stock fund and an S&P 500 Index fund will typically have similar holdings. In fact, their holdings could be so similar that the performance is almost identical.

Why Diversify?

The point of diversification is not that the funds have different names or come from different fund families but that the funds each represent different types of fund categories. You want the objectives and performance of the funds to have low correlation with each other. In different words, you want one fund to "zig" while the other "zags." If most or all of your funds perform similarly, you may as well just have one fund, which is not diversification.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.