Diversification is in no way for whimps
Martin Hawes delves into why we don’t spread our nest eggs around.
Iwas once told of a financial writer who called diversification ‘‘diwussification’’. Apparently, this writer’s big idea was that diversification was for cowards.
Well, courage is not always an asset. Years ago, at school, my English teacher told us that there was often little difference between bravery and stupidly – that being a coward was often more intelligent than being brave.
Nevertheless, putting questions of bravery, intelligence and stupidity aside, to diversify or not to diversify depends largely on your financial position and your goals, not whether you are a ‘‘wuss’’.
This is a question of horses and courses – you need to choose the right horse for the right course.
There is a time for every purpose: the strategy that made you wealthy may not keep you wealthy.
Concentrating your money in just one area could grow your wealth quickly (assuming you make the right choice!)
Many people in their 30s, 40s and 50s have much of their wealth in a business, some rental properties or a concentrated holding of shares.
That’s fine for younger people: most who do well financially have concentrated what they have into just one asset, even though we should recognise that everything is hanging on just one thread.
If diversification is about putting your eggs in multiple baskets, concentration means to have just one basket, but being very sure it is a good basket.
Such people are often young and have big goals – and, as such, they are right to focus on just one thing and to make that one thing work.
Of course, this is a high stakes game.
People who concentrate their wealth may be successful, but they may also end up in the doss house: one bad move or major economic downturn and they are in a queue looking for a free bowl of soup.
And so there does come a time when people with big goals need to take risk off the table. They may have got to a stage when they have reached their goals and can ease back to a good lifestyle: it is time for them to ‘‘diwussify’’.
Usually the trigger is age. Younger people can be brave and take risks – if their business goes bad, they have time for another go.
Not so for people in their 60s or 70s. At that age bravery really can be stupidity and they need to sell down their business or properties and start to spread their money around.
At a certain age, it is time embrace the inner coward and be a wuss: it is time to diversify.
Martin Hawes is the chair of the Summer KiwiSaver Investment Committee. Martin is an Authorised Financial Adviser and a Disclosure Statements is available from him on request and free of charge at www.martinhawes.com. This article is general in nature and not personalised advice.