Diversification Is Ignorance Protection

Diversification Is Ignorance Protection

Diversification is typical financial planning advice that average investors use to protect themselves from losses.  Simply put, diversification is ignorance protection.  It is admitting that you don’t know what you are doing.

It is common to think of investing and the stock market as one and the same. However, investing encompasses much more than just the stock market.  There are four main asset classes:

  1. Paper Assets: stocks, bonds, savings, the forex market, etc.
  2. Commodities: crude oil, gold, silver, wheat, etc.
  3. Property: rental real estate, fix and flip, etc.
  4. Business: owning a business, angel investor, etc.

Let’s step back and think more broadly about the big picture of investing.  How can we best put our dollars to work to create more for us?

Diversification Is Ignorance Protection

Most people diversify because they don’t know what’s going to work out.  When most people talk about diversification, they mean spread your investments within the stock market.  You pack all your bets within the paper asset space, leaving yourself open to systemic risk.  Diversification is admitting that you’re going to lose money in some of your investments.

Successful investors like Warren Buffet do not diversify in this way.  Instead, they focus on investing in companies that they understand and influence.

Diversification is protection against ignorance.  It makes little sense if you know what you are doing.Warren Buffet

All that asset management, diversification, that’s for idiots. You can’t diversify enough to know what you’re doing.Mark Cuban

You see, diversification for the sake of diversification is ignorance protection.  So it’s not just buying a basket of stocks and diversifying your risk across a stock portfolio.  If you want to model the wealthy, it’s really about saying, how do I increase my knowledge, control, and focus?

What we want to do is focus on developing our investor identity, so we’re able to invest intentionally.  It is this intentional focus that leads to our best investments, rather than spreading out our investment dollars and hoping that something works out.

When you’re focused with knowledge and control, you’re more likely to be successful.

Instead of diversifying, focus on what you know and control.

Rachel Marshall

Rachel Marshall

Rachel empowers her clients to maximize and control their money so that they can accomplish their dreams and live out their highest purpose. She believes that if you understand the short and long-term impacts of the financial choices you make, you’re better suited to make choices that put you in control of your resources. She helps you discover money flowing out of your control, strategize ways to have more money flowing into your control so that the end result is that you have more money to retain and utilize during your lifetime, and more to pass on to future generations.

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