Diversification Of Investments: You’re Doing It Wrong

From rentals, stocks, commodities, and intellectual properties, everyone should be invested in multiple assets.

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It is rare to find anyone who puts all of their money into a single stock or bond and let that be. Most people instead buy multiple stocks, bonds, or funds. They claim this is diversifying their investments, but this is not true diversification of investments. Unfortunately, even a well balanced fund only has investments in select assets from the stock and bond market. Investors should aim to have multiple different classes of investments not just stocks and bonds.

Why Are Mutual Funds Not Enough Anymore?


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Mutual funds invest into several different companies in which provide a decent level of diversification. This helps prevent massive loses in investments. But that is not enough. The stock and bond market is more global than ever, for good and for bad. The good is that anyone can buy and sell their investments at almost anytime. The bad is that anyone can buy and sell their investments at almost anytime. Since more people are investing in the market, more people are also selling their shares in the market. This makes the market more volatile.

Even worse, John Bogle, found that index funds (a mutual fund which matches a market index) may have negative effects on the market. These funds invest into entire markets and several stocks. When people invest in the markets, they are nervous about the volatility in the market. When people sell shares of their funds in these markets they are not just selling a share of a fund, but parts of multiple individual stocks and bonds.

Let’s say you have an individual investment in a company, but someone sells shares of their funds when the market is down, it does not matter that the individual company you invested in is doing well, your stock will under perform because of the sale from the mutual fund. By only investing in a fund, you will only match certain markets. While you will grow wealth quite well by matching certain markets, you will never quite beat the market. Even investing in individual stocks and bonds will not isolate you from the swings of the market. As easy as it is to invest in the stock and bond market, you must extend beyond stocks and bonds if you want more than a comfortable retirement and supplemental income.

Real Estate Is Not Always Real Enough


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Real estate, despite having the best potential for growth, is a risky investment. Traditional methods require mortgages in which you cannot guarantee cash flow and may lose even more than the money you invested. Investing in real estate, even in rental properties should never be the only investment you have. If you have negative cash flow on your property, you may have to default.

Commodities Only Work During The Worst Of Times


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Commodities like gold and oil can serve as investments. However, they are not correlated to the market, in fact, these commodities only tend to increase during political and economic uncertainty. Investors are attracted to investments that will do well during the worst of times.

Gold can be useful in the diversification of investments. That being said, I do not see many commodities as useful in individual investments. It may be me, but I do not see the point of investing in an asset because you are not hopeful in the growth of the economy. It just makes no sense when you say that out loud or write it down. I may purchase funds in which have some investments in commodities, but that is to balance the fund and control risk while expecting growth. It should never be your sole asset, especially if the market is uncertain.

Business


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In Rich Dad, Poor Dad, Robert T. Kiyosaki said “do your day job, but mind your own business.” I believe he said this for a good reason, you can (and probably should) work for a stable income. Your business is a decent asset, and hopefully a great one. That being said, the income is dynamic and at any moment you may be told to cease any actions. You can work for decades in your business and have it all taken away. You have the most control in your own business, making it the most hands on asset. However, you can still lose it all.

I have heard from many business owners that they put all of their savings in their business. Please do not do that. You need diversification of investments and investing solely in your business does not meet that.

Cryptocurrency

Does anyone know how cryptocurrency is an asset? How does your investment help with money and where does the money come from? No one knows. Anyone who says they know is lying to you, or has such an underground presence that their lies are probably the most saintly thing they could have done. It was literally built in a clandestine environment, the black market. Even if cryptocurrency was not volatile, the returns are not guaranteed and cryptocurrency may not even exist tomorrow. Do not invest everything into cryptocurrency. If you do, have some other assets secured.

Intellectual Properties


Intellectual properties are any creative work in which you get paid for the right to reproduce it or distribute it from other platforms. These range from haikus to blockbuster movies. That being said, people may never pay you to have anything to do with your intellectual works. Every successful author I know wrote more than one work.

Some people may point to J. K. Rowling and claim she was successful from only the Harry Potter series. Correction, she became well know from Harry Potter and started her success. She has 7 books in the series and many movies so it was not just one intellectual property. She has sold her intellectual works to multiple media platforms to grow her success. Besides, she is a woman of many talents. Ask Robert Galbraith, author of the Cameron Strike series, a mystery series (and quite gory one). “He” knows that J. K. Rowling has writing skills beyond a young adult fantasy series. “He” is very close to her.

Even with her success in writing, I believe she has other assets. She is secretive about her money, but she did start a website to boost her sales. At the very least she has an entrepreneurial spirit and if she is wise with her money at all, she invested into at least some other assets.

Final Thoughts

Anyone who knows anything about finance knows that diversification of investments is necessary for your financial future. What people have wrong is that you cannot just buy several stocks and/or a mutual fund and be diversified. You should invest in several different assets. Even assets you have more control over than anyone can be affected by external factors and even shut down. Aim for true diversification of investments to forge your wealth.

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