WHEN I was a child, my mother taught me the adage, “Don’t put all your eggs in one basket”.
In adulthood, I made the logical link between that eggy saying and the world of prudent investing.
When we choose to invest, we may opt to concentrate or diversify our funds. I explored these important facets of investing, concentration, and diversification, plus recollections of my beloved mother in a January 2016 Money Thoughts column.
She was still alive back when it was published; she passed away that August. You may read the piece here:
www.nst.com.my/news/2016/01/120262/eggs-baskets-and-3-layers-diversification
In any lifelong investing journey, which should stretch two, three, four, five, or even six decades, there is a risk-attenuating tool we might use called “the sleep test”.
When we invest our hard-earned money into the capital market, we need to decide if we should concentrate or diversify our allocation of capital.
In general, the greater the concentration of capital, the higher the price volatility of your portfolio. Conversely, the more diversified your portfolio, the less volatility you experience over time.
For those who are rationally wired to worry more about steep intermediate plummets of our portfolio’s valuation than shallow dips, more diversification grants us greater comfort. But beware:
Excessive diversification also wipes out volatility on the upside.
So, if we diversify too much, we can’t reap healthy long-term investment portfolio gains which, hopefully, beat inflation’s insatiable erosion of our money’s purchasing power over many years.
How then do we figure out how much volatility — or investment risk — we should stomach?
LEVEL OF RISK
First, seek out capital market professionals who may guide and teach you about this fascinating field.
Here in Malaysia, you may seek out experienced unit trust consultants, fund managers and licensed financial planners.
Second, you should monitor your mental state. It is pointless investing in a too-concentrated portfolio with price gyrations so wild your body develops ulcers and you suffer from insomnia.
To counter those physical negatives, use the well-regarded “sleep test” for investors — be they novices or pros.
You may tweak the level of risk (inherent volatility) of your portfolio downward by increasing the “number of egg-baskets” or stocks or, better yet, funds you utilise. As that investment population grows, your portfolio’s volatility should moderate so the zigzagging of total portfolio value over time falls.
However, you don’t want your entire portfolio to have sterilised returns that can’t beat inflation because you went overboard and sardine-packed too many investments into too many baskets. Conversely, you don’t want a portfolio so concentrated that its volatility is too much for your emotions to handle.
Enter the “sleep test”:
Use it to calibrate your scope of diversification to just above the point that permits you to sleep well even during the worst of imploding bear markets.
Sleep is precious.
In Act II, Scene 2 of his tragic play Macbeth, William Shakespeare had the main (murderous) character Macbeth declare to his wife:
“Sleep, that knits up the raveled sleave of care,
“The death of each day’s life, sore labour’s bath,
“Balm of hurt minds, great nature’s second course,
“Chief nourisher in life’s feast;”
The Bard wrote Macbeth between 1606 and 1607, so do make allowances for his Elizabethan turns of phrase.
In 21st century parlance, Shakespeare’s soaring words mean that:
Sleep heals us and is essential for a healthy life.
Of course, we have always known this. More than 2,000 years ago, the Roman poet Ovid wrote in his collection of stories entitled Metamorphoses:
“O Sleep, in whom all things find rest, most peaceful of the gods, you who calm the mind, put cares to flight, soothe limbs wearied by harsh tasks and refresh them for their toil.”
What’s my point?
There is no sense ladling in so much volatility into our wealth-building portfolios — through excessive concentration — that the resultant wild volatility in daily aggregate valuations worry us sick.
STRIKING A BALANCE
So, how do we strike a balance, like Goldilocks did in her fairytale shared with the three bears, between “porridge” that is too hot and too cold?
Well, to stabilise a portfolio: Add cash. As we thicken our layer of cash, as one of several asset classes in our portfolios, we stabilise its overall volatility. Cash dampens or “cools off” intense portfolio volatility.
Conversely, to spice up a portfolio: Add risk-on asset classes like equities, investment real estate, and alternative investments.
These tumultuous times we are in are worsened by United States President Trump‘s trade tariffs and his self-named “Big Beautiful Bill” which, according to his administration is wonderful (www.whitehouse.gov/articles/2025/07/president-trumps-one-big-beautiful-bill-is-now-the-law/), yet to objective professional observers appears likely to add between US$3 trillion and US$5 trillion to America’s national debt over the coming decade. (For details, read: www.bloomberg.com/explainers/us-national-debt)
So, you might wish to jazz up your portfolio returns by looking out for risk-on investments that benefit from rising inflation and growing sovereign debt levels worldwide. Admittedly, identifying such targeted portfolio elements might take professional guidance.
Nonetheless, I hope my advice allows you to make near-term portfolio tweaks that:
1. Help you sleep soundly at night; and that
2. Yield you attractive investment gains over time.
© 2025 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; connect with him on LinkedIn at www.linkedin.com/in/rajendevadason, or via [email protected]. You can also follow him on X @Rajen Devadason and on YouTube (Rajen Devadason).
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