Right now I have CNBC on mute (I’m addicted to the tickers, not necessarily the reporting) and Jim Cramer has a huge billboard up promoting being “Diversified”.
This idea has been drummed into
sheeple’s people’s heads for so long by Wall St. and the big banks that I beg of you to please open your mind for just a second and give me a chance to refute this common financial myth, or at least to poke a few holes in it.
First off, in the midst of the current financial crisis and sovereign debt debacle, most markets are moving in lock-step, even markets that have traditionally been “uncorrelated” to one another. People are rushing to the so-called safety of the U.S. dollar and treasury market (ha, but that is the subject of another post…) and markets are moving as much or more on rumors than on fundamentals. All global stock markets are down, gold and silver have taken a beating this past week, oil is down, bonds are paying such a low yield it is less than inflation in many cases, and the real estate market shows no signs of bottoming, particularly if interest rates rise in the future and/or the government decides to get rid of the mortgage interest deduction. So even if you own ALL of the above investment “vehicles”, are you getting any of the supposed so-called benefits of diversification? I doubt it!
Second, let’s take a look at the “smart money”….are they diversified? Warren Buffett, arguably one of the best investors of all-time, has this to say about diversification, “diversification is protection against ignorance– it’s better to put all your eggs in one basket and then watch that basket very, very closely!”. He himself owns Berkshire Hathaway, a compilation of U.S. and global businesses, and that’s it– he believes in investing only in what he understands (although he is a supremely experienced and savvy investor and probably “understands” a lot more complex financial instruments than you or I do!). Jim Rogers, co-founder of the incredibly successful Quantum Fund with George Soros, owns metals and agriculture. Donald Trump focuses on real estate. Robert Kiyosaki focuses on his business and real estate. If any of these billionaires were asked the question, “so, how did you achieve your great wealth?”, I can guarantee that they wouldn’t answer “through proper diversification”.
Finally, many people own 10 different stocks or mutual funds and think they are “diversified” because they don’t have all of their money riding on only one stock or fund…needless to say, this is not considered true “diversification” at all.
My point here (I have one, I swear!) 🙂 is that you should be extremely wary of words and their meanings and very cautious when applying financial “advice” from anyone who doesn’t truly have your best interest at heart (and frankly, no one will ever care as much about your money as you do, so that person is you!).
When determining your financial strategy, ask yourself questions like, “do I want to become wealthy or do I want to play it safe?” and “what is the best strategy for me to get there?” and if great wealth is what you are shooting for, “can I really achieve great wealth through diversification?”. Diversification has its place, but only you know your own personal financial goals and dreams and how you will best be able to achieve them in the quickest way possible.
For me, that’s not being “diversified”– it’s focusing my money on the things I understand and then watching those things very, very closely.
YMMV…. Let me know your thoughts on diversification in the comments below! Are you diversified? What does diversification mean to you?
To your financial success,
— Kung Fu Girl