Don't put all eggs in one basket

The Contrarian Way—Blood in the Streets
Even the most unadventurous investor knows that there comes a time when you must buy, not because everyone is getting in on a good thing but because everyone is getting out.

Just as great athletes go through slumps when many fans turn their backs, the stock prices of otherwise great companies occasionally go through slumps, which accelerate as fickle investors bail out. As Baron Rothschild supposedly once said, smart investors "buy when there is blood in the streets, even if the blood is their own."

Nobody is arguing that you should buy garbage stocks. The point is that there are times when good investments become oversold, which presents a buying opportunity for investors who have done their homework.

The classic barometers used to gauge whether a stock may be oversold are the company's price-to-earnings ratio and book value. Both measures have well-established historical norms for both the broad markets and for specific industries. When companies slip well below these historical averages for superficial or systemic reasons, smart investors smell an opportunity to double their money.

The Classic Way—Earning It Slowly
Investors who have been around for a while will remember the classic Smith Barney commercial from the 1980s in which British actor John Houseman informs viewers in his unmistakable accent that "they make money the old fashioned way—they earn it."1

When it comes to the most traditional way of doubling your money, that commercial is not too far from the truth. The time-tested way to double your money over a reasonable amount of time is to invest in a solid, non-speculative portfolio that's diversified between blue chip stocks and investment-grade bonds.

It won't double in a year, but it should, eventually, given the old rule of 72. The rule of 72 is a famous shortcut for calculating how long it will take for an investment to double if its growth compounds. Just divide 72 by your expected annual rate. The result is the number of years it will take to double your money.

Considering that large, blue chip stocks have returned roughly 10% annually over the last 100 years and investment-grade bonds have returned roughly 5.9% between 1928 and 2020, a portfolio divided evenly between the two should return about 8% a year.21

Dividing 72 by that expected return rate indicates that this portfolio should double every nine years. That's not too shabby when you consider that it will quadruple after 18 years.

When dealing with low rates of return, the rule of 72 is a fairly accurate predictor. This chart compares the numbers given by the rule of 72 and the actual number of years it would take these investments to double in value.

Notice that, although it gives a quick and rough estimate, the rule of 72 gets less precise as rates of return become higher.

What are 3 ways to invest?

There are three to choose from: real estate, stocks, and fixed income (bonds). Each has its own risks, opportunities, and tax rules. While building a complete portfolio might seem complex, the dividends, interest, and rents can be worth it.

DON’T PUT ALL YOUR EGGS IN ONE BASKET
Meaning:
This is a piece of advice which means that one should not concentrate all efforts and resources in one area as one could lose everything.

Example:
Mr Tan’s financial adviser urged him to be careful and not put all his eggs in one basket by investing all his money on stocks.

Did you know?
This phrase was said to be first used in the novel “Don Quixote”, where it was written “It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.”