The oldest wisdom in investing
Imagine putting all your savings into one stock. The company goes bankrupt. You lose everything. That is the opposite of diversification.
Diversification simply means spreading your investments across many different stocks, sectors and ideally countries. So that when one investment goes badly, the others save you.
"No one can take from you what you have wisely distributed."
— Florence Scovel Shinn
Three levels of diversification
Across stocks
Instead of buying only Equinor, you buy Equinor, DNB, Mowi, Telenor and Kongsberg. Then you are not dependent on one company succeeding.
Across sectors
Spread investments between energy, finance, technology, seafood and healthcare. Different sectors react differently to the same events in the global economy.
Across countries
Norway is a small market. By also investing in the US, Europe and Asia you reduce the risk of Norwegian problems destroying your entire portfolio.
Rule of thumb: 15-20 stocks in at least 5 different sectors provides good diversification for most private investors.
Common mistake: Many think they are diversified because they own 10 stocks — but all are oil companies. That is not diversification, it is concentration in one sector.
"Fear is only faith in the wrong thing. Spread your faith — and your investments — far and wide."
— Florence Scovel Shinn