Even if you only know a little bit about investing, you know that diversification is a good thing. We’ve all heard the talking heads saying “You’ve got to be diversified!”. We’ve seen the movies with wealthy folks on yachts saying “I’m diversified!”
But what exactly is diversification? According to investopedia.com, diversification is a risk management strategy that mixes a wide variety of investments within a portfolio.
I’ve seen a lot of investment portfolios over the years, and almost everyone tells me that they are diversified. But oftentimes when digging into the nuts and bolts, diversification is not what I find. Let’s be clear, having lots of “stuff” does not cut it.
To set the stage we should establish why diversification is important. Let’s say that you have $1 million in you 401(k). You’ve worked at the same job for 20 plus years. You have a pension. You have a great employee stock purchase plan. Your life insurance and disability insurance is provided by your employer. Your 401(k) is 100% invested in your employer’s company stock. After all, they’ve been good to you, and you believe in the product they produce. The fact of the matter is that while you probably feel good about your situation, you are in danger of overexposure to one company. What if the pension collapses and the company stock tanks, and your benefits are reduced, etc. etc.?
Now, most situations are not this obvious. But let’s say you manage all of our own assets. You’ve done a pretty good job of picking stocks over the last year. You’re holding a plethora of high-flying growth tech stocks that have outperformed the markets significantly in recent history. Good for you. Now imagine that the year is not 2021, it’s 2000.
I could go on and on with examples. It’s not having bank accounts and CDs strewn all over the place. That’s all FDIC. It’s not having 4 different financial advisors who don’t see the whole picture. They probably have you in similar stuff, and now you are overlapping risk. And it’s not having a slate of annuities from multiple insurance companies. Diversification is about owning many assets in various asset classes. A diversified portfolio should include things that don’t all go up when the markets go up, and don’t all go down when the markets go down.
It’s not exciting. In fact, I would argue that diversification has never made anyone rich, but it keeps people from going broke all the time. If you think that you are diversified, it may be time to park the yacht and have an independent second opinion.
In the meantime, you can enjoy a Vieux Carre, a diverse twist on the classic Manhattan…
- 3/4 oz Rye Whiskey
- 3/4 oz Cognac
- 3/4 oz Sweet Vermouth
- 1 barspoon Benedictinea
- 2 dashes Angostura Bitters
- 2 dashes Peychaud’s Bitters
- 1 Lemon Peel (for garnish)
You can combine these in a mixing glass and make it like a Manhattan, but Walter Bergeron, the inventor built it in a rocks glass just like an old fashioned, and that’s the way we’ve done it.