Diversify and Conquer


|True diversification should mean looking across everything we own and ensuring there is always something of value that can be monetized, regardless of the economic environment.|

Investing is not a zero-sum game. It is also a fallacy that someone else must lose money for you to profit. All the talk about “beating” the averages serves only to distract from the point, which is to generate a meaningful return on your investments while minimizing any risk of significant loss. Important and often overlooked is the ability to monetize those assets when you need them. This implies an investor should own a variety of assets, often referred to in the investment world as Diversification.

The notion that you simply have to have a specific number of stocks or mutual funds to achieve a “well balanced” portfolio seems to miss the point; especially when numbers ranging from 10 to 500 have been suggested by very smart people as what it takes to be diversified. Warren Buffett observed that too much diversification is difficult to manage (the actual quote is “If you have a harem of 40 women you never get to know any of them very well.”). The S&P 500 index gets its name from the number of stocks it holds – out of a possible 6000 equities found in an all-U.S. stocks fund.

Yet a laser focus on equity investments is to risk being not truly diversified. If all your assets are in stocks and/or bonds, what happens when financial markets swoon? Were you at all concerned about your stock portfolio during the market mayhem of 2009? On the other hand, if the bulk of your assets are gold coins stored in a safe deposit box what happens if the bank building is destroyed? If most of your assets are leveraged rental properties, what happens when you need cash fast? True diversity should mean looking across everything we own and ensuring there is always something of value that can be monetized, regardless of the economic environment.

One of the most successful family dynasties of all time, the Rothschild’s, have followed a very simple formula for diversification that has proven robust for over 400 years. It is just too easy to look at a stock portfolio or collection of rental houses while overlooking the many other things of value that you own, or that you can add to help create a truly diversified collection of assets. There is a benefit to working with the Rothschild model, even if just as a mental exercise, because it forces you to consider the bigger picture. 

  • One-third in cash; this includes equities, bonds, T-bills, exchange-traded funds, foreign currencies, certificates of deposit, and pretty much everything else represented by paper.
  • One-third in real estate; this includes a primary residence(s), vacation home(s), income-producing property such as ranches, farms, even raw land.
  • One-third in art and collectibles; this includes not just paintings and Egyptian antiquities, but jewelry (think gold, precious gems, wristwatches), furniture, fine china and flatware, a classic automobile, and pretty much any object that has a market value and can be sold.

Whatever your financial goals, follow your own instincts, not those of people who might view the world differently than you do. And don’t get distracted by what other people claim to be achieving. Remember, you don’t have to “beat” anything over time to create wealth. The only thing that really matters is the value and availability of your assets when you really need them.

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