Are you familiar with the idea of diversification in asset management? It’s probably safe to say that most of us seniors and retirees are, but there are possibly some new investors amongst our younger readership who may be unfamiliar with the concept.
Basically, it means that by spreading our assets across a variety of markets and strategies, we’ll be more likely to harvest a broader based set of investment returns.
Being ‘diversified’ means that should some of our investments not perform as well as we’d hoped, we still have others who do. We’ve made a conscious decision to have variety in our portfolios to hedge against loss.
Colloquially, diversification means we don’t put all our eggs in one basket.
Diversification Is Dynamic
It’s important to remember that diversification is dynamic. It’s not about a one-time selection. A group of assets may perform well in your portfolio, while others might not. When that happens, your portfolio becomes unbalanced and, depending on the circumstances, you need to take remedial action.
Put simply, portfolio rebalancing is the equivalent of regular maintenance for your investments. It’s a bit like going to the doctor for an annual checkup or getting your car’s oil changed and the tires rotated.
With the help of your financial advisor, you can assess the total situation before deciding (possibly) to sell some assets and buy others.
The key is to achieve a degree of asset allocation that delivers an acceptable level (this differs from person to person) of risk-adjusted returns.
That, in a nutshell, sums up the diversification process as it relates to your investments.
Now we have another question for you. Have you ever thought about diversifying yourself? That’s right, applying the same concept to your personal lifestyle.
When we consider the various roles we play in life – in our careers, personal life, relationships, family life, social life, etc – it’s clear that our total happiness and fulfilment typically comes from multiple sources, just as a diversified portfolio does for our financial life.
Elaborating on the above observation in a recent article in Forbes, psychologist Brett Steenbarger, made the following comment:
“With our psychological eggs in few baskets, we become vulnerable when the areas of our focus – our careers, our market participation, our romantic relationships – stop yielding returns. The diversified life is one in which we seek a balanced personal portfolio, with some areas of life yielding satisfaction and fulfilment even when others fall short.
This perspective raises interesting questions: How balanced is your life portfolio? If one area of your life were to not work out, how vulnerable would you be? When is the last time you rebalanced your life’s portfolio? When have you last expanded your life portfolio?”
Identity & Self-Diversification
The issue of self-diversification was raised in another quarter, perhaps improbably, by the Harvard Business Review several years ago. The article to which we refer was entitled Diversify Yourself and it carried an observation made by Dr. Paul Rosenfield, Assistant Clinical Professor of Psychiatry at Columbia University:
“When we diversify ourselves, we have something to fall back on. When one identity fails, the other ones keep you alive. If you lose your job but you identify passionately as a mother or a father, you’ll be fine. If you have a strong religious identity or a view of yourself as an artist, you’ll be fine. If you see yourself as an athlete, or even simply as a good, loyal friend, you’ll be fine.”
The Bottom Line
Cultivating a strong sense of self and having a rational perspective is perhaps even more important as we age, though it matters at every stage of life. Just as there are multiple pathways to prosperity, so too there are multiple pathways to personal fulfilment.
Leading a one-track life can be as big a mistake as depending on a one-track portfolio.
Dr. Rosenfield concludes by saying: “Having multiple identities will help you perform better in each one. Because you learn things as an athlete or a parent or a poet that will make you a better employee or leader or friend. So, the more you invest yourself in multiple identities, the less likely you’ll lose any one of them. Of course, if you do lose one, you’ll be okay because you’ve got the others.”