Which investment principle suggests you shouldn't put all your eggs in one basket?

The principle that suggests you shouldn't put all your eggs in one basket is diversification. This investment strategy emphasizes spreading investments across various assets or asset classes to reduce risk. When an investor diversifies, they are less likely to suffer major losses because the performance of different investments can vary significantly. For instance, if one investment performs poorly, others may perform well, thereby balancing the overall portfolio returns.

Diversification works because it allows investors to mitigate risks associated with individual securities or sectors. By not concentrating funds into a single investment, investors can protect themselves from the potential volatility and unpredictability of financial markets. This is particularly important because different asset classes (such as stocks, bonds, and real estate) often react differently to market conditions, economic changes, or specific events.

In contrast, risk aversion refers to the tendency of investors to prefer lower-risk investments, while hedging involves using strategies to offset potential losses in investments. Liquidity pertains to how quickly assets can be converted into cash without significantly affecting their price. While all of these concepts play important roles in investment strategies, diversification specifically addresses the risks associated with concentrating investments in a single asset.