The adage 'Do not put all your eggs in one basket' is a cornerstone principle in investment strategy, known as diversification. Concentrating all investments in a single avenue heightens risk, akin to risking all eggs with one basket. Just as a mishap could result in the loss of all eggs, investing solely in one fund or market exposes one's entire capital to market volatility, which is inherently unpredictable.

Diversification extends beyond mere asset class allocation, encompassing differentiation within stocks and bonds. For equities, diversification entails allocating across various sectors (e.g., technology, healthcare) and market capitalizations (i.e., size of companies). Within bonds, diversification spans different types, such as government, corporate, and high-yield bonds. This approach mitigates both interest rate and default risks, as different bond types respond diversely to interest rate shifts and corporate circumstances.

Furthermore, diversification can go wrong on either extreme—too little or too much. A portfolio overly concentrated in one asset class or composed of too few securities may expose investors to unnecessary risk. Warren Buffet once said, “Wide diversification is only required when investors do not understand what they are doing.” Over-diversification, in particular, may diminish potential returns while increasing complexity and trading costs.