I read about this comparison in an investment book quite some time ago. Unfortunately, I can’t remember which book. I borrowed it from a public library in Richmond, British Columbia.
Suppose that we have $10,000. We’ll compare two investment cases.
Case 1:
- Invest $10,000 in an investment vehicle with an average return of 5% annually.
- After 10 years, our money will grow to $16,288.
Case 2:
- Divide $10,000 into 4 and invest them in 4 different investment vehicles with the following returns:
| Principal | Return (annually) | After 10 years |
| $2,500 | -100% | $0 |
| $2,500 | 0% | $2,500 |
| $2,500 | 5% | $4,072 |
| $2,500 | 20% | $15,479 |
| Total | $22,051 |
- The first $2,500 is invested in a company that went bankrupt, so we lost everything.
- The second and third $2,500 are invested in companies that did “so-so”.
- The last $2,500 hit a “home-run”. The company did very well with the annual return of 20%.
- After 10 years, our money will grow to $22,051.
As we can see, if we’re willing to take more risks, we’ll get higher return. Even if we lost everything in one of our vehicles, as long as we hit home-run in another vehicle, we should be more than fine.
The big question is, of course, how to hit the “home-run”…. 
