There are many examples as to how diversification has benefited individual investors. A recent one that comes to mind is the tech bubble in 2000.
Let’s say, in early 2000 your entire life savings was invested in technology stocks, i.e. a non-diversified portfolio. The tech bubble burst and your portfolio went down 50%.
In comparison, say that your investment portfolio consisted of a broad range of stocks across every industry. Not only did you have tech stocks in your portfolio, but you also had oil, manufacturing, utilities, real estate, and health care stocks. Now when the tech bubble hit, your portfolio only went down 15%.
In the first example, the investor who sustained a 50% loss, needs a 100% gain to get back to even. The second investor, lost a lot less, and only needs an 18% return to get back to even.
Smart investors understand that every different industry is cyclical. In other words, every industry experiences highs and lows.
The best investors know that they can’t predict ahead of time which industry will go up or down. Therefore, they choose to invest in them all. This protects them from very large losses. Thus, increasing their gain over time.
The Diversification of Life
The short lesson in diversification can just as well be applied to life.
While investing, we may diversify across different sectors such as technology, health care, real estate, etc… In life, we need to diversify our energy across different areas such as health, finances, spirituality, career, family, relationships, etc…
Track Something Else besides Money
It’s very easy to let a bad financial situation ruin your entire life. I see this very often with people who are in debt. They let their net worth define who they are. When a bill comes or a debt collector calls, their entire day is ruined.
Just like a diversified portfolio avoids the big losses, so does a diversified life. Just because your finances are currently bad, doesn’t mean you have to let that bring down your family, health, or spirituality.
The nice thing about money is that it’s easy to track. You have a concrete number to measure your improvement. Unfortunately, money is the only thing many people track.
If money is the only area of life where your measure your improvement, your subconscious will believe that’s all there is to life. Therefore, when your finances are not going well, either are you.
This is why it’s extremely beneficial to track other things besides money.
An easy way to start is to measure your health. What you decide to measure is entirely up to you. It can range anywhere from tracking your weight to the number of times you workout per week. The idea is to find something you can track, that you can measure your improvement over time.
Diversifying Your Identity
Remember, how a 50% loss, actually needed a 100% gain to get back to even and a 15% loss needed only an 18% gain to get back to even? Well, if invest your time and energy in other areas besides money, you avoid life’s big losses. Thus, you’re not fighting all the time getting back to even, you’re working on getting ahead.
Photo by: Dystoops