First let’s all agree, or not, on what diversification is in the context of investing. ‘Course, even that’s a tall order as it’ll depend upon who’s talkin’. Is it the financial planner? Is it the ‘expert’ hired by your employer to guide you in the investments you choose for your 401(k)? Who is it, and more importantly what dogs if any do they have in the fight?
Far more often than most would imagine, my job requires me to tell folks they shouldn’t invest their money into real estate, or make that exchange. They’re the only dog I have in the fight. Any other way of doing business doesn’t make sense to me.
One of my favorite Warren Buffet quotes says exactly what he thinks about the ‘traditional’ concept of diversification from the investor’s perspective.
“Diversification is for those who don’t know what they’re doing.”
Kinda harsh, but coming from a man who’s richer than God, I’ve taken his word for it. 
His point though, as expanded, is very well taken. Investing in the stock market using Wall Street’s working definition of the concept, is primarily designed to minimize risk by ‘hedging’ your bets. You buy ‘A’ but also ‘B’ which tend to react to the same stimulus very differently. If A rises, often B will suffer, and vice versa. The entire portfolio is constructed this way. This is playing not to lose — which is what Buffett is talking about.
The result?
It’s kinda like buying a Ferrari then intentionally having a governor put on the engine so that it can never exceed 60 mph. So the car looks cool, it just can’t perform due to the built-in retardation of any potential performance. As soon as you put the peddle to the metal, ‘diversification’ kicks in, resulting in a maximum speed of 60 mph no matter what you do to go faster.
I’ve always taught a different sort of diversification. Duh.
Geographic for instance where real estate is involved. A plant closes in one area, but doesn’t affect areas far away. Or, apportioning you investment capital into completely different categories of investment. It could be stocks, bonds, real estate, gold — whatever keeps you in your comfort zone.
Ask all those folks who’ve lost 30-45% of their hard earned IRA/401′s recently what they think of all the ‘prudent’ and ‘safe’ diversification they had in place before the meltdown. They won’t think it’s funny. They thought they were protected almost anywhere the market moved cuz they were told by the ‘experts’ their portfolio was ‘diversified’.
Really? How’s that been workin’ for ‘em lately?
For those with sufficient holdings in their IRA or 401(k), I strongly suggest you consider taking control of your Plan. We’ll be talking about that here often, as it’s become very attractive for those who’ve grown tired of losing money ‘automatically’ with every paycheck. They wonder if there’s a better way. I’m here to tell ya there is.
Nothing’s foolproof, and there’s no perfect way to invest, but it’s certainly better than your experience with your company’s plan to this point — wouldn’t you agree? The investment world is relative in nature. Relatively safer returns, or cash flow, or stability.
Don’t fall into the trap of paying for a Ferrari designed in the factory to underperform.
In the coming weeks I’ll be getting into the nuts and bolts of how to increase your options using the capital currently held hostage by your IRA’s and 401(k) Qualified Plans.
Meanwhile, back at BawldGuyRanch, give me a buzz at 619 889-7100 and we’ll see what options your menu has been hiding. Have a good one.
Related posts:
- Investment Diversification – Father Of Mediocre Performance
- Facts About Buying Real Estate Through IRA’s and 401(k) Qualified Plans
- Addicted To Cash Flow When Growth Is The Prescription — A Common Investment Mistake
- Some Facts and Definitions About Self Directed IRA’s
- Random Thoughts In Search of Facts
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