The full rhyme:
Don't put all your eggs in one,
Eggs in one, eggs in one,
Don't put all your eggs in one,
Spread them all around.
Your dollars are the eggs. Each company whose stock you buy is a basket. Put all your dollars into one company's stock, and if that company fails, you lose everything. Spread your dollars across many companies' stock instead, and one company's failure cannot wipe you out.
There are two kinds of risk.
- Something can go wrong at one company. Bad news, a lawsuit, a bad product, a strong competitor. That risk belongs to that one company.
- Something can go wrong for the whole market. A recession, high inflation, rising interest rates. Every investor feels this kind, no matter which companies they own.
Spreading your dollars across many companies helps with the first kind of risk. Put your money into companies that do not all move together. When one has a bad year, the others usually do not have a bad year for the same reason. The damage gets smoothed out. This will not protect you when the whole market falls. But it does protect you from one company's bad luck sinking your whole plan.
Here is an example. Say you put all your money into one company. That company drops 60 percent. Your whole portfolio just dropped 60 percent too. Now say that same company only holds a small slice of your money, and the rest is spread across many other companies. That one company drops 60 percent again. This time your total portfolio barely feels it, because most of your money was somewhere else.
A quick reality check. Spreading your dollars around does not protect you when the entire stock market drops. It does not guarantee you will make money or avoid losing money. It only reduces one specific kind of risk: putting all your money into a single company.
Bottom line. "Don't put all your eggs in one basket" is not just a catchy saying. Applied to the stock market, it means don't put all your dollars into one company. That is real, well-established advice.