Rule #1: Diversification (and why it matters)
When it comes to investing, one word can protect your future better than almost anything else: Diversification. Diversification means spreading your money across different investments instead of betting everything on one company, one industry, or one idea.
Think about it like this: If you only invest in one company and it crashes, you lose everything. But if you invest in hundreds of companies, one crash doesn’t take you down.
Diversification is your safety net. It’s the smartest way to lower risk without lowering your opportunity to grow.
The truth is, nobody can predict exactly which companies, industries, or countries will perform best every year. Even the experts guess wrong sometimes. Diversification helps you:
- Protect yourself from bad luck
- Stay invested through market ups and downs
- Capture growth from lots of different places
- Sleep better at night (seriously)
It doesn’t guarantee gains, but it can protect your portfolio from major disasters.
Real-Life Example
Imagine you took some great advice as a kid and invested in a company you felt you knew a lot about: Toy’s R Us! After all, you’re a Toy’s R Us kid! Now let’s imagine you put all your money into that one company because you thought it’s “the next big thing.” Unfortunately, as we now know, Toy’s R Us got crushed by eCommerce and went bankrupt.
If that was your only investment—you’re out of luck. You’d have lost all your money.
But if you had invested across hundreds of companies through something like an S&P 500 index fund, one company’s fall wouldn’t ruin your future. You’d still own 499 other companies trying to win.
Smart investors don’t put all their eggs in one basket. They own lots of baskets.
How Do You Diversify?
Diversification doesn’t have to be complicated. Here are some ways it happens:
| Type of Diversification | What It Means |
|---|---|
| Across Companies | Owning many different companies, not just one or two |
| Across Industries | Owning businesses from different sectors (tech, healthcare, energy, etc.) |
| Across Asset Types | Mixing investments like stocks, bonds, and cash |
| Across Geography | Owning companies from different countries |
Most young adults first experience diversification through index funds and ETFs, which naturally spread investments across hundreds or thousands of businesses.
Example:
- When you invest in an S&P 500 index fund, you’re instantly diversified across 500 major U.S. companies.
- If you invest in a global index fund, you’re diversified across the entire world economy.
Diversification and Long-Term Investing
Diversification isn’t about getting rich fast. It’s about staying invested, surviving the rough years, and thriving over decades.
By building a diversified portfolio:
- You’re less likely to panic when markets drop
- You’re more likely to stick to your plan
- You’re putting yourself in a better position to reach big life goals
Patience + Diversification = Power.
Rule #2: Action By Being Inactive
There are great piles of research showing time and again that one of the biggest investing mistakes people make is to buy and sell way too often. Even looking at your investments often is correlated to lower returns—it’s just too tempting to fiddle.
Timing the market is not easy. And think about it: you not only need to time when you buy, but also when you sell! We try to time the market and miss out. Or get scared by a big drop and sell our stock only to miss out on the bounce that often follows a few days later. Nearly all of the very best days to be invested in the stock market have been within days or weeks of the very worst ones.
Consider this:
J.P. Morgan Asset Management calculated that a $10,000 investment in an S&P 500 index fund would have been worth $32,421 if allowed to accumulate between 2000 and the end of 2019—a 20-year period that saw more than 5,000 trading days.
If you missed the 10 best days, it would leave you with $16,180, or just half as much—and that’s before paying capital-gains taxes! Missing the 20 best days would leave you with hardly any gain at all.
Warren Buffett’s “20-Slot” Rule
Warren Buffett is considered one the best stock pickers of all time. He’s like the Tom Brady of picking stocks!
When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”
He says, “Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”