Diversification is a fundamental principle of prudent investing. The old adage “don’t put all your eggs in one basket” prevented investors with a balanced portfolio from being destroyed during the 2008 economic downturn. Those who had all their eggs in real estate, housing and certain narrow market segments got their heads handed to them. Those who remained diversified survived and possibly are on the cusp of flourishing in 2012.
The principle of diversification also has applicability in the business world. Here are a few gentle reminders:
- Having multiple suppliers (rather than one) allows you to choose among competitors and prevents supply chain disruptions if one supplier fails. Price competition is also encouraged among multiple suppliers.
- Having a broad customer or client base insulates against having your “biggest” customer’s problems become your problems, or losing a large chunk of business when your “big” customer is acquired by a larger company that uses other suppliers.
- Dealing with more than one bank or financial institution insulates your business from the negative effects of having your “only” bank taken over by a larger, less friendly institution and also encourages healthy competition for your business.
- Having a fully trained staff of employees with overlapping job coverage prevents one key employee from holding your business hostage to unreasonable demands or behavior.
Diversification, whether among suppliers, customers, banks or your employees, equals independence. If you are not diversified – whether in business or in your investments – you are hostage to a set of assumptions that are out of your control. You are dependent upon the status quo. Over the long haul, the only certainty in business is change. Be prepared for this through diversification or be prepared to have your (proverbial) head handed to you some day.
— Kevin Palmer