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Why Diversification is Important in Investing

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Jason is a full time investor and shares his experiences with investing to the world.

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In our quests seeking out financial advice, at some point we will encounter the topic of diversification of your assets and investments. Depending who you ask, some financial gurus recommend staying as diversified as possible with your assets to mitigate risk, while others suggest the truly successful investors go all in on one thing and never look back, putting all their eggs in one basket. Often times we may end up confusing ourselves on our investment strategy, and may make emotional decisions based upon whichever of these strategies we learned about. I am here to tell you that both strategies hold some truth, but what makes it the wrong strategy is dependent on what your goals for investing are. This article details my experiences with both strategies and what I would suggest for you given what you want your long-term outlook is.

why-diversification-is-important-in-investing

What Makes Both Strategies True?

What makes both of these strategies true is they have worked for all types of entrepreneurs at one point or another. Neither strategy is wrong, but neither strategy is totally right, depending on what your goals for life are. Bill Gates or Steve Jobs would have had a harder time starting up their respected companies if they were focusing on many different startups concurrently. On the contrast, the average family who just wants to retire comfortably is taking a huge risk if every dollar they have is tied up into one company in the stock market, especially if it is a company they have no direct control over. Instead, they are more likely to retire comfortably if they are invested in diversified assets such as index funds. Both strategies have been proven to work, but the key is finding what you want from life and adjusting your strategy accordingly.

why-diversification-is-important-in-investing

The Benefits of Going All In for One Investment

This type of strategy works for those that have huge ambitions in the entrepreneur world and want complete control of their financial destiny. An example entrepreneur in this category is Patrick Bet-David, founder of CEO of both PHP Insurance and Valuetainment. He once explained that he decided to go all in with every dollar he had to startup PHP and was committed to make it work. Cutting off all options and making the decision to focus on one investment, and he has succeeded. Of course, for every success story their is also one where a person totally commits to their cause, and unfortunately does not succeed. Perhaps they chose the wrong investment strategy to begin with. Another well known entrepreneur who can fit into this category is Elon Musk, a committed individual to making Tesla a startup success. Both of these entrepreneurs decided to take personal control of their financial future and making one thing a success.

The benefits to this strategy is focusing all your energy into making one thing succeed instead of several things. If Elon Musk and Patrick Bet-David had their attention divided among several different investments when starting up their respected company's, their is a fair chance they may have failed in the process, because they would have had half-hearted effort or their attention would be in too many places at once. Often times the most successful entrepreneurs that focus on one thing also far exceed their competition. As the saying goes, the bigger the risk, the bigger the reward, and this investment strategy is a prime example of that statement.

why-diversification-is-important-in-investing
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The Benefits of Diversifying Your Investments

This investment strategy is the one I personally follow and feel is the best strategy to follow for a majority of people. What diversifying your assets means is not going all in with one industry. Often times it is recommended to have seven different investments. Examples can include commodities, individual stocks, index funds, mutual funds, real estate, cryptocurrency, and of course your personal business. In recent years, some have even suggested seven is no longer enough. The reason to be spread out like this is incase one of them dries up or folds, you have all the others to fall back on. No matter the economic situation, something is almost always guaranteed to be going strong when all else is failing. An example of this is during the 2008 Recession, while real estate and stocks were falling, the price of commodities were reaching all time highs. When stocks crashed for a short time in Spring 2020, cryptocurrency made a huge leap forward and gained traction during this time. No matter the economic situation, something is almost always guaranteed to be going strong.

The benefits I personally experience with this strategy is I invest with less emotion involved and I can continue building steady wealth even during uncertain times. While many others are panicking about stocks crashing, or the real estate market going down, or seeing Bitcoin's price crash, and making emotional financial decisions revolved around these events, I am able to keep a more level head because something is always going well for me financially. While the bigger the risk, the bigger the reward, I prefer being at peace of mind knowing I will still see steady growth over time for having assets diversified, and I am confident many others would feel this way as well.

why-diversification-is-important-in-investing

How Should You Decide Between Strategies?

How you choose between these two strategies depends on what you want from life and what your goals are. Typically, those who go all in on one investment have a crystal clear vision for a business idea and have their back against the wall committed to making it succeed, and accept their fate either way. For those who are diversified, they look for steady long-term growth and may rather focus on other aspects of life versus going out and starting a corporation or inventing the next Tesla. Neither strategy is wrong, but one generally works more for each of us over the other. The key is understanding what your risk tolerance is in life and what you ultimately want from life.

Choose Your Strategy and Control Your Destiny

Choose Your Strategy and Control Your Destiny

My Thoughts

As I mentioned previously, I personally want to stay as diversified as much as possible financially and want that peace of mind knowing something in my portfolio is succeeding even if something else is down. I feel this strategy works best for a majority of people. Unless you plan to go out and invent the next greatest invention of the century, or wanting to start a mega corporation that you have a crystal clear vision for starting up, it is best for a majority of people to play it safe and have that steady long-term growth. Your strategy may change over time as well. If you went all in on your investment and succeeded, perhaps once you feel fulfilled, you can branch out and diversify, or vice versa. Both strategies give you some control over your financial destiny, but for a majority of people, it would be better to mitigate their risk and stay diversified. The key is understanding what you want from life and adjusting your financial strategy accordingly.

I hope you found this article helpful and wish you the best in your financial endeavors.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2022 Jason

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