During your working life, you use the work of your hands to earn a paycheck — and that is an important asset.
The work you do is just one part of your lifetime portfolio. The other part is what you do with your earnings and how you make your earnings grow. You wouldn't put all your money on lottery tickets, hoping for a big hit. Talk about putting all your eggs in one basket.
The same way, experts advise that you find many different baskets for your savings. This is called diversification, and it means everything to investing success.
One mistake is investing money in the company you work for. This overlaps the work of your hands with the work of your money. You are in one basket.
According to Intelligent Investor writer Jason Zweig, you don't want the work of you hands and the work of your dollars to be in the same place.
But many people do just that.
According to a recent study by the Social Science Research Network, 51 percent of people surveyed believed that a diversified bundle of 10 investments is riskier than investing in a single stock.
Not true.
The study found that diversifying investments (putting money into different stocks or market sectors) reduces risk.
Zweig writes that people who don't diversify probably feel more comfortable investing in one company or stock they know, rather than ten other mysterious companies. But comfort is misleading.
One way to diversify investments is to invest in stock-market index funds. These funds put your money in hundreds of companies. Even if one-fifth lose money, you will still gain because the others have not lost money.
