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Put all Your Eggs in One Basket!!

The classical portfolio management theories like Markowitz Portfolio Theory and The Efficient Frontier suggest that investment in financial assets must be done in such a way that return from one asset offset the return from another asset. By doing so, investor will be indifferent about the economic cycle and the overall return from the asset will be better in the long run. Hence these theories suggest investors that if any investor want to be better off from their investment they should simply: 
Don’t put your all their eggs in same basket.
Of course it’s easy said than done. There are techniques that should be followed to make the best selection of assets for a portfolio. And no matter how careful an investor is in selecting the assets in portfolio, he/she is not 100% sure that it offsets the risk.

There theories were devised when the things around the world were much simpler. Technology and world market had not expanded so exponentially. The flow of information and its impact in the prices of financial assets were not so immense.

As the development in technology and specifically information technology continues, market failures are becoming more frequent. In current world, there is so rapid flow of information that even the financial intermediaries are unable to keep track of the new information. To make things worse, many Financial Institutions and investors don’t knot know what to do with that information they receive. Further, many suffer with “Knowledge Diarrhea”, a buzz word that has been gaining popularity which means information overload and inability to handle the information.

No portfolio theory or the financial system has been able to protect the investors. Large number of banks, financial institutions and business corporation have given their way to the financial crunches. The list includes many giant companies of the past, which are now just a history.
In the light of these developments there are few questions that everyone should be asking:
  1. Are the financial systems laid out in developed nations right?
  2. Do those portfolio theories still hold true in the context of the world?
  3. Should developing nations follow the financial system of developed nations that have failed over and over again.
These questions have led to development of new concept in the financial market – as “The Economist” suggest:
Put all your eggs in one basket and watch them closely
This concept has emerged simply because no one is able to rightly predict the future trend of the market and even best rated companies have failed overnight.

So if you are going to invest in this rapidly changing world, the best strategy would be to
  • invest in one asset
  • watch its progress closely and 
  • take another position as soon as you see any hiccups in the market
There are probably no other strategies at the current point of time that will protect investors from the financial crunches. However, this is also not a 100% foolproof strategy. But investors following this strategy are seen to be better off than those following the classical strategy.

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