Don’t put your eggs all in one basket
Posted by siteadmin on Friday 25th September 2015.
The language of the financial world can be daunting for people on the outside looking in.
The money management industry does have a reputation for using terminology and phrases which to the average layperson read like gobbledegook.
I’ve always strived to explain money matters in a simple, accessible way which everyone can understand.
In fact, I have a good friend who I often use as a testing board. He’s bright and successful but not versed in the world of finance, its language and nuances. Plus, he asks a lot of questions.
It’s almost a rule of thumb I have that if he understands what I’m trying to get across then the majority of people will.
He asked me last week what asset allocation meant? It’s a fair question and one I’ve been asked many times. Quite simply, it means where you are going to put/invest your money.
Then he comes back with ‘got it, understood, but what’s risk management when it comes to allocating these assets Les?’
Again, a sensible question and one with a reasonably simple surface answer. Risk management can be described as ensuring your money is placed in places and products where the risks are clear, controlled and more importantly understood.
Probably the simplest form of risk management is NOT putting all of your financial nest eggs in one basket. In the past I’ve seen clients invest up to 50 per cent of their ‘asset allocation pot’ in one company’s shares. This can be really risky. For a topical example, just look at what can happen to the share price of a blue chip company such as VW.
Another I've seen is only keeping your money with one Bank or Building Society. Remember that the Northern Rock issue and the wider banking crises wasn't that long ago.
Examples of the various baskets we need to utilise to put those all important eggs in include, NISAs, Pensions, property, a healthy emergency fund, premium bonds as well as ensuring that we access a wide spread geographically.
I’m always happy to answer any financial planning questions you or even my constantly curious friend have so please don’t hesitate to contact me to have an informal, jargon free chat.