Don’t play favorites, diversify
Risk plays a huge roll in investing in anything, including the stock market. One of the dumbest things you can do in the stock market is put all your money in one company.
Diversification is important in investing. It can mean putting money into different types of investments such as stocks, bonds, and funds as well as purchasing different companies. You want to have diverse investments.
Diversity reduces risk. Why? I’ll try to describe it in basic terms. Let’s say you just got $1,000 for graduation. You can do anything you want with it. Maybe you decide you’ll use it for college, but you won’t need to spend it for 6 months.
Meanwhile, your friend says he needs to borrow $1,000 to pay for car repairs and he’ll pay it back in 4 months plus 4% interest for each month. That means you’ll make back $160 in 4 months.
Then, 2 other friends also need to borrow $500 each and they say they will pay it back in 5 months for 2.5% interest. This way you will only make $125.
Why would you take less? Because the first friend might decide to take an extra 3 months to pay it back and doesn’t pay interest for those months. Now you won’t have the money when you need it.
If you gave it to the other friends and one paid it back on time and the other 2 months late, you’ll still have $500, plus the interest they paid. In this case, you didn’t lose out as much.
You can never know for sure what any investment will do. That’s why it’s best to have several. Most likely, on average, over the years they will balance out to about 10 - 13% per year which is the national historical average rate of return on stocks. If you’re averaging better, good job!
You need to take risks, but make them smart.
