Money alone does not make you happy. You also need shares, gold and real estate.

Danny Kaye (18 January 1911 – 3 March 1987), American actor

It is not known if the American actor was particularly eager or if he was just joking with these words. Anyway, he touched on an important principle that all investors should respect: the principle of “not putting all your eggs in one basket”. When investing, this means not investing all your money in a single asset, but allocating it to a variety of assets. In short: diversifying its investments.

Why diversify?

A day before we wrote this post, the German construction company Bilfinger published a “profit warning” informing the public that its financial results would be significantly lower than it had anticipated. In the space of a few hours, the share price of Bilfinger lost more than 18% of its value.

Imagine that you had previously invested all your money in Bilfinger shares – you would have lost more than 18% of your wealth in a few hours – a nightmare!

This example perfectly illustrates what can happen if we focus our investments on a single asset. It does not take a scientist to conclude that it is better allocate our investments to several different assets.

But beware ! The diversification of our investments alone will not ensure us a profit and does not guarantee that we will not suffer any losses. But diversifying our investments allows us to spread the risks associated with our various investments so that the overall risk for our investment does not exceed the level that we deem acceptable.

It is also necessary that diversification is well done. Indeed, it is not enough simply to buy shares of several different companies, for example, to create an efficiently diversified stock portfolio.