Diversification – have eggs in multiple baskets

What is diversification?

You’ve probably heard ‘putting all your eggs in one basket’.  Diversification is the opposite – ‘have your eggs spread across multiple baskets’.  You drop one basket and there are still plenty of baskets remaining.  To think of it in the financial world, you would not put your entire share portfolio into one stock/company.  If that company goes bankrupt you are left with nothing.  Similar you should not put all your money into one country or sector e.g. people made a fortune betting on tech companies, but when that bubble burst you were left with nothing.

The best way to make steady profits is have a diversified portfolio i.e. a mix of low risk, medium risk and high risk strategies that are all expected to be profitable long term.  When one strategy turns out not to be profitable, the losses will be absorbed by the other profitable strategies.

Would you put your entire betting bank on one bet? 

That should be an easy one.  The answer is ‘no’ in case anyone is still struggling.

Even if you are 99% sure it will win and the odd are amazing, there is still that 1% chance you will lose everything.  If you are comfortable with that sort of risk, then your risk tolerance levels are way higher than mine.  Sure, put a large chunk of money on it, just don’t bet the mortgage on it.

Should you use one profitable system only?

For some people the answer to this is yes.  They know a system is profitable (e.g. pre-race trading), and even though they may go through a few bad runs, overall they make money long term.

However, by having multiple profitable systems you will have steadier profits in the long term.  If one system has a bad run, the expectation is the losses will be offset by the other systems.  Obviously, the key here is that each system needs to be profitable in the long term.

Even a blind squirrel occasionally finds a nut

When I say you need some higher risk systems, they still need to make profit in the long term.  Just because a system occasionally finds a long odds winner, it doesn’t mean it is a good system to add to your portfolio.  To the previous point, only include systems that are profitable over the long term…..emphasis on the long term!

Should you only bet on one type of sport?

Having all your systems based on one type of sport may be fine if that is where your expertise is.  The key to making money from sports betting is by having an edge over the bookies and everyone else.  The best way to do that is to be an expert in a particular field i.e. have better knowledge than everyone else.  Being a jack of all trades is not going to help you be an expert on any given sport.

By betting on different sports, this will further diversify your portfolio but may not increase your overall profitability.  I would recommend focussing on one type of sport e.g. football or horse racing, but potentially having one or two systems from other sports.

Are your systems correlated?

To add some caution, ensure all your systems for any given sport are not heavily correlated.  By this I mean, if all your systems are based on similar criteria there is always a risk that as one system starts to fail all the systems start to fail. The more diversified you are across different sports, different markets, different strategies, the less correlated you will be.

When you talk about systems/strategies, what do you mean?

I do not mean the systems that marketers push in your direction and say are profitable.  As you will have no idea how these picks are made, you will have no idea how diversified you are.  Systems are betting methods or techniques that make money in the long term.  For example, a split may be:

  • Back to Lay trend bets (bet on odds early morning that you predict will shorten)
  • Pre-racing trading (scalping the markets based on short term moves)
  • In-play trading (automated dobbing)
  • Straight backing systems (some focussing on low odds, some on mid-range odds, and some on long shots).

How diversified should I be?

That is the million-dollar question that will depend on your risk tolerance level.  Due to time constraints I limit myself to the above 4 strategies (pre-race trading being the most time consuming).  The other best can be automated and set-up in the morning/evening, leaving me free to concentrate on scalping the markets during the day (when I’m not working!).