Ecclesiastes 11:2 Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.
In investing terms, diversificationGlossary: Spreading money across different investments so that no single company, sector or event can do outsized damage to the whole portfolio. means to hold multiple investments, not just a single stock, ETFGlossary: A fund that holds a basket of investments, like stocks or bonds, and trades on an exchange like a single stock. One share gives you a slice of everything the fund owns., or mutual fund. What’s popular and moving up today, may not be what’s popular and moving up tomorrow. By spreading our investment dollars around to various investments, we can avoid one single event, company failure, or news headline to devastate our whole portfolio.
It’s happened more often than we can count. Companies with CEOs touting their incredible growth and spending lavishly on executive perks and expensive sponsorships have imploded out of the blue. WorldCom and Enron were two such companies and represent two of the largest financial frauds in U.S. history, collectively wiping out over $100 billion in shareholder value. Both companies utilized systemic accounting manipulation to cook their financial books, mask mounting operational distress, and deceive analysts before completely unraveling into multi-billion-dollar bankruptcies. And before you think that these were small companies, Enron sponsored a major league baseball stadium, Enron Field, home of the Houston Astros, and Enron’s CEO Ken Lay was close friends with former President George W. Bush.
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