Imagine you had a friend, whom we’ll name the “diversify guy,” who never brings just one kind of chips to movie night. He is the same way when it comes to investing. He doesn’t have any special sauce; he just hates putting all his money on one horse. You could say he’s “carefully adventurous.” He always has a variety of shoes, stocks, or snacks.
Think about dispersing risk as not placing all your eggs in one basket. Who wants to get egg on their face? Take a look at the neighbors. One person swears by tech. Another person put more money into crypto. Who do you think is sleeping better? The guy who has a little bit of everything. One apple turns bad? There is still a banana, an orange, and maybe even a kiwi hiding in the fruit bowl.
Next, imagine that you are at a buffet. Why eat salad greens when you can fill yourself on meat, pasta, and that fancy cheese that no one can say? Of course, eating too much of anything will make you sick, but a little of this and a little of that? You are now dining like a king. Investing works in a similar way. The individual who diversifies buys blue-chip stocks, tries out bonds, and sometimes even picks a wild card, like emerging markets.
Of sure, people make mistakes. Some people believe that just buying funds is enough. But if all of those funds go down in the same boat when the economy hits a rough patch, those high management costs hurt twice as much. Instead, the diversify guy invests in several industries, regions, and even styles of investing. It’s not so much about picking winners as it is about covering the bases when the outfielders are sleeping.
You meet people who think this sounds boring. They get excited about chasing unicorn stocks. They exclaim, “I’m all-in on biotech!” like they know for sure that it’s a good idea. But everyone loves a story about someone who comes back. The diversified guy lets people fail because he knows that tomorrow’s surprise typically comes from the most unlikely place. Talk to anyone who lived through the dot-com boom or the banking bust. There are surprises, that’s for sure. Sometimes in poor suits and at bad times.
People become passionate when they talk at backyard barbecues. Someone waves their beer and says, “You’re leaving money on the table!” The individual who wants to diversify shrugs. He wants to know how much peace of mind is worth. Will you give up a moonshot for a good night’s sleep? All you have to do is compare: After the next downturn, see who is still happy. The guy with all his chips in the riskiest basket is almost never the one.
It’s not simply stocks that you should diversify. Think of real estate, money, and even collectibles. Nothing says security like a closet full of rare coins. He says that baseball cards will pay for his retirement, but he’s only half-joking.
Aim for the moon, but have a parachute ready. The guy who diversifies? He is getting ready for tough times, sailing through storms, and constantly, always trying everything at the buffet. Even if the grass seems greener on the other side, he has a whole picnic.