If you’ve followed me for any amount of time or spoken to me about investing, I have most likely pulled out this line:
A globally diversified basket of equitiesMe (about every 5 minutes)
But for those just starting out on their investment journey, I am aware it could lead to a WTF?! moment… ‘if I just nod and smile long enough he’ll eventually shut up’.
So, it’s time for me to right any potential wrongs and lay out exactly WTF I’m on about.
Let’s break it down word by word, in reverse order:
You may know this one better by one of its other names, ‘stocks’ or ‘shares’ being the most used (the financial services industry LOVES jargon!).
Equities/stocks/shares = part ownership of a company in exchange for money.
Companies that want to raise money (for themselves, not charity) often ‘go public’, which means they offer the public (you and me) the opportunity to buy a piece of their business.
You give them money and they give you a share of their business.
If Microsoft was a pie, you are able to buy a slice.
Buying a slice of a business makes you a partial owner of that business and as a partial owner you are entitled to a share of the profits (aka dividends) – ideal!
All being well, the business will be successful and become larger and more profitable over time. The larger and more profitable it becomes, the more someone else will be willing to pay to buy your slice off you – lovely!
Now, the downside of this affair is that you might buy a slice of bad pie.
That slice of bad pie begins to go mouldy and no one wants to buy it from you. You are then stuck holding a slice of inedible pie – less than ideal!!
So we have a problem, there is a whole bunch of good looking pie out there and it is very hard to know which ones will stay good and which ones will turn out bad.
Luckily, there is an answer to this problem: diversification… more on that soon.
You know this one.
Baskets are handy wicker storage devices that you can put multiple things in.
And it is no different in this instance. When talking about a basket of equities, I am talking about holding multiple equities in one place.
The jargon word would be ‘portfolio’.
In finance, a portfolio is a collection of assets being held for a specific purpose, such as providing an income at retirement… I know, sounds fancy doesn’t it.
Basket of equities = collection of equities.
Collection of equities = holding lots of different slices of pie.
You with me?
Cool, let’s move on.
Hey, if you are enjoying my content then please subscribe! You’ll get new slices of pie delivered straight to your basket 😅
Ok, now we are cooking!
I’m sure you can see where we are going with this.
Being diversified is about holding lots of different slices of pie.
Because nobody can predict the future. Unless you have a crystal ball there is no way of knowing which piece of pie will stay good.
In business terms, there is no way of knowing which businesses will perform well in the future and which ones will fall into oblivion… history is littered with companies that have fallen from grace.
If anyone tells you they can reliably pick which equities to invest in then they are a charlatan. A liar. Or even worse, they are completely misguided as to their own ability. Either way, avoid them like the plague.
So, if we cannot know which businesses will be the best in the future, what do we do?
WE BUY THEM ALL!!
Let’s whip out another basket analogy. The OG basket analogy.
The analogy all other analogies wished they could be.
You know it…
DON’T PUT ALL YOUR EGGS IN ONE BASKET!
This is the perfect analogy for diversification.
In this instance the basket is a business and the eggs are your money.
With all your eggs in one basket you are counting on that basket not to break. If it does you are ruined. No more eggs. Sorry. Back to square one you go.
(Side note: if you hold a lot of money in a single cryptocurrency or stock, you are betting that basket isn’t going to break… I hope you have your crystal ball handy!).
So, when investing we spread our eggs across a lot of baskets.
My eggs are spread across more than 5,000 baskets – even better, I don’t have to choose the baskets! There are companies that can sort this for you in a cost efficient way.
(To confirm, my money is automatically invested into 5,000+ businesses each month).
OK, I think I’ve hammered those analogies to death.
Lets move on and I promise not to mention baskets, eggs or pies again!
Well, we made it. The final/first word.
The easiest word.
If you want to invest in 5,000
baskets businesses then it’s best to do so at a global scale (worldwide).
Again, it’s to do with diversification.
Just like you cannot predict which businesses will be excelling in the future, you also cannot predict which countries will be.
Without getting too deep into it, you are spreading your risk out.
If you only invested in the USA and they were hit by a continent-shattering earthquake, your investments would be buggered.
If you have investments elsewhere then they will pick up the slack whilst the USA is recovering (yes, I am aware that if the USA collapsed this would ruin the global markets. No, I do not think this is going to happen… it is just an example).
Think of each country as a really big basket, with lots of little baskets within it (sorry, I couldn’t help myself!).
So, let’s put it all together…
WTF does it mean when I hold a globally diversified basket of equities?!
- You are the part owner of thousands of businesses across the globe, entitled to a share of their profits.
- Your eggs are safely spread worldwide within multiple baskets.
- You own a wonderful array of pie slices from around the world. You are a pie connoisseur 😉
If you do nothing else but hold a globally diversified basket of equities for the long term you will outperform most investors (and I don’t need a crystal ball to tell you that).
I hope that is clear.
If not, feel free to contact me with any questions!
Remember: pies, baskets, eggs…
Don’t forget to subscribe to ensure those fresh slices of pie straight to your basket 😄
I appreciate you x
Thanks for reading,
Pie Connoisseur & Wicker Basket Enthusiast
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