October 19, 2016
Over the years, the financial world has made a big deal about being “diversified” with your investments.
While I’m the first to agree that not having all of your eggs in one basket is a good way to protect more of your money, the wall street narrative if diversification has potentially hurt both investors and savers alike.
Just the other day, I had a couple come in to meet with me, and were concerned that their investment accounts were not growing. They said they liked their advisor, but never felt like they could keep up with all the paperwork; the advisor assured them that they were “diversified,” and that there was nothing to worry about (even though they weren’t making any money.)
So what’s the premise behind diversification. Let’s take a simple example of real estate.
Let’s say you had a bunch of money and wanted to buy real estate as an investment. You could go out to one particular area of town and buy a large office building with all of your money. Or you could take that same amount of money and buy several small office buildings and other commercial buildings in different areas of town.
In the first example of investing in one large office building, you could make a killing on your investment. But what happens if that area of town goes south, or the tenants who occupy the building move out on you? Suddenly, your investment would be at risk.
Now, with the other example of buying different types of properties in different areas of town, you have minimized the possibility of something going wrong with one of the properties in hopes that the other properties would not suffer. On the surface, this makes perfect sense for anyone who is concerned about risk.
So in the area of wall street, and with the introduction of mutual funds and the growing popularity of them beginning in the late ‘80s, we saw this concept of diversification take hold. This is particularly true with the 401(k), which sometimes resembles a sushi menu with all the different selections of various types of funds that half of the consumers don’t understand. You’re lead to believe that if you start throwing darts and picking different types of funds, then you’re safe. That’s not always the case.
Maybe the answer isn’t diversification…maybe for savers, the answer is: just keep things simple and safe.