By Joseph Reinke, CFA, CEO of FitBUX
Business Insider recently published an article detailing an interview with one of the most famous investors of all time, Jim Rogers. This article details how Jim Rogers does not believe in diversification.
“Well, I know that people are taught to diversify. But diversification is just something that brokers came up with, so they don’t get sued. If you want to get rich… you have to concentrate and focus.” – Jim Rogers
I agree 100% with Jim, but when it comes to money management, most consumers don’t understand what Jim is referring to so I want to take a minute in this article to clarify a few things:
- 1) Why most people say they are “diversifying” but in reality don’t have the ability to do so and have “all their eggs” in one basket; and
- 2) The difference between investing and money management.
My Money Management Strategy Diversifies My Assets, What Do You Mean I’m Not Diversified?
Investopedia defines diversification as “a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.”
For diversification to “work” you have to hold a large array of different assets and cannot have one asset dominate your asset portfolio…this is why most Americans who believe they are following a diversified strategy really are not.
For example, many Americans who have financial assets to invest, also own a house. For this example, let’s assume you have a home with $250,000 in equity. To be “properly” diversified, let’s assume that one asset should not make up more than about 5% of your portfolio, which most investment professionals would argue would still be on the high side. That means that to “properly” diversify your entire portfolio of assets, you would have to have a total of $5.0 million, and that is just with $250,000 in home equity.
Obviously, a vast majority of Americans have nowhere near that amount of money. It’s not uncommon to meet people that have 40% - 90% of their net worth in their primary residence. I’ve heard some say that equity in a home doesn’t count. Their reasoning is that it’s their “home” and not a financial asset. However, the bottom line is its’ an asset.
So, should you try to diversify or listen to Jim Rogers? It depends on your goals...
Investing vs. Money Management
I’ve often heard people say, “I used a financial advisor but he didn’t know what he was doing. I didn’t get the returns that I wanted” or “I lost money on my investments.” People say this because they have a misconception of what a financial advisor’s job is. His job is to manage your money, which entails reducing the risk based on your situation and to do so with the money you gave him to manage (i.e., he helps you diversify your assets).
Consumers often think financial advisors are supposed to pick the next “hot” stock that earns 30% a year. After all, that is their profession, is it not? No, it is not; their profession is money management not investing. Investing is what Jim Rogers is talking about in his interview. It is a full time job that requires extreme skill and dedication. If you want to invest, you should not pay someone to do it. You should be the one doing it and if you are doing it do it properly that is.
I wrap up with a quote that was told to me when I was about ten years old regarding investing:
“True investors take risk and understand that risk. They hedge the risk by studying and dedicating their lives to finding the right investments to purchase. However, they know the risk is always there and could lose everything. Bottom line is, if you are an investor you must have faith in your abilities but be prepared to go bankrupt if everything goes south on you.”
If investing doesn’t suit your style, keep it simple and/or pay a financial advisor to manage your money.