A well-known investment adage is, “don’t put all your eggs in one basket.” The literal translation is, if the one and only basket falls, then all your eggs will be broken. But if you kept your eggs in several baskets, then the fall of one basket will not destroy your entire stock of eggs.
Applied to financial investing, the rule is, don’t put your entire savings into one company’s stock. If that one company fails, then all of your savings will be gone. The solution is to diversify – spread your investment dollars over several unrelated businesses and industries.
Unfortunately, many Canadians apply the “one basket” rule to financial institutions. That is, they “diversify” by spreading their investment savings over two or three different financial institutions. Not only is this NOT an application of the rule, but by doing so, the savings might actually end up in the same basket!
Each financial institution may not be aware of what the other financial institutions are recommending for the client’s portfolio. As a result, the client may end up with the same stocks in all of their investment accounts.
Sometimes, overdiversification can lead to no diversification.
Hazel Fluke, Financially Speaking 