Portfolio diversification: Starcraft analogy

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My 11 year old is a big fan of Starcraft II, a strategy computer game. If you know the game, you will be aware there are two resources in the game, Vespene Gas and Minerals.  Units in the game can collect these resources and use them as commodities to build new items, or as currency to finance acquisitions, for example fighting or healing units in one of the three armies, Zerg (Alien insects), Protoss (A highly advanced alien race) or Terrans (Humans).  The resources Vespene Gas and Minerals are valuable and necessary for any successful Starcraft II army.  Especially if you want to have success in the game or annihilate your enemy’s bases.  Successful armies require Vespene Gas and Minerals so there is always a market for these resources.

If I was an investor in the Starcraft universe, I would have two possible resources to invest in, Vespene Gas or Minerals.  If I bought only Vespene Gas, my investment portfolio would contain one thing: Vespene Gas.  Say I invested only in a Zerg Vespene Gas field I would have only the risk attached to owning a Zerg Vespene Gas field.

If one day the Protoss came along and blew it up, and blew up all my harvesting units, I would loose all of my investment.  I would have nothing and be all of a sudden very poor.  If I  had instead put only half my assets into the Zerg Vespene Gas field and the other half into a Terran Minerals deposit I would have reduced my risk.  My portfolio would be half Minerals and half Vespene Gas. I would still have my investment in the Minerals even if the gas field was destroyed. I would only loose half of my investment.

By investing in both resources I am spreading my risk and hopefully by doing so reducing my total investment risk. This is why it is so important to build a diverse portfolio and why people say “not to put all your eggs in one basket”.  That is why it is unwise to only invest in Vespene Gas.

 

*Note: This is a very simple example of portfolio diversification for demonstration purposes only. It should not be taken as investment advice. At the time of writing I do not and have not previously held stocks in Blizzard Activision (or Vespene Gas for that matter!)

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