Mark Twain once famously claimed that the best way to invest is to put all your eggs in one basket — and watch that basket! And there’s a lot of insight there. Concentrating your energy and your attention is a good way to grow a business or develop yourself professionally. It’s a reasonable approach to managing risks you can control.
But diversification is the way to manage risks that you can’t control. The economy, weather, government shutdowns—there’s not much you or I can do about these. So dividing assets among different ventures reduces your dependence on any single investment.
Shakespeare understood this four centuries ago. Early in The Merchant of Venice one of his main characters says , “My ventures are not in one bottom trusted; / Nor to one place; nor is my whole estate / Upon the fortune of this present year.” Splitting up his interests makes him more secure.
Diversification is the compliment that wisdom pays to prudence—because we don’t know the future. Specialization may build wealth, but diversification preserves it.
Douglas R. Tengdin, CFA
Chief Investment Officer