the true way to diversify

When you think of diversification, do you think of bonds? Or holding 10 different stocks? What most investors fail to realize is that diversification doesn’t just mean keeping your money in different market sectors. The true way to diversify includes investment in areas other than the stock and bond market. lonetree

I have never really internalized this thought. My family were (and are) traditionalists in regards to personal finance. My parents and my grandparents had a formula for success that was simple, and it worked. Study hard in school, get a good stable job, live a moderately frugal lifestyle and invest your savings in stocks. Bonds were a backup. Real estate was a treacherous minefield, to be avoided except in purchasing a place to live. Debt was shameful, so much so that even a mortgage was an embarrassing necessary evil, to be paid off as fast as possible – and because of that attitude I have always been exceptionally debt-averse. Investing meant the stock market. This approach worked well. My parents are, for all intents and purposes, financially free at the age of 58 (and really before that if they had wanted to stretch a bit).

As for me, I’ve come to realize that investing can include real estate, P2P lending, small business partnerships or funding, even art. I think often that I should diversify my investments into those areas. However, there is a better and truer way to diversify. If you extend the definition even further, it can include things like a college education; which has a greater return, an index fund with a 10% return or a college degree that increases your lifetime earnings by 50%? Investing can even stretch to include investing in your community or supporting causes. An investment makes you richer (either financially or in life). Investments can mean time spent helping your aging parents, or your grandchildren in your own old age, or your friends or anyone who needs it.

So don’t think of investing as just a way to grow $1 to $5. It’s not always about the money. Investing in your happiness is worth something. Investing in travel while you’re young is worth something. Investing your time in your child or your family or your community is worth a lot. Even the time I’ve invested in writing this blog has been worth infinitely more than the income I’ve received from it.

Investing in your life is the truest and best way to diversify.

13 comments

  • I agree. In fact I especially think that investing in society and investing in personal happiness are important. Some of that is via money, but more by time and thought – which nearly everyone should be able to do.

  • Very true. That is why I like to take a holistic look at my investments sometimes. Real estate including your primary residence can be something that is very easy to be overweighted in without realizing it.

  • I like your thoughts about how investing applies to more than just money. I love stocks, but it’s important to make investments in non-financial areas to have a balanced life.

  • I like how you think here. Investing is not always about dollars and cents, that is something I have to constantly remind myself.

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  • I concur – but stocks are easy ways to track other assets as well like real estate, gold, and commodities. I’m sure someone will come up with a p2p lending ETF one of these days
    -Raymond

  • MBB: True. I always debate, though, whether ownership of a stock (ETF) that in turn has interests in gold or whatever doesn’t still expose you to market risk. Surely the ETF could be subject to pressures in the event of a really severe market downturn – lack of confidence in the overall condition of the market? It’s always a vague doubt that I have about investment vehicles that REPRESENT investment in some other asset class.

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  • That was certainly though provoking. i find myself struggling to stay allocated in the traditional manner. 🙂

    Best Wishes,
    D4L

  • @D4L: I know, it’s bad enough just trying to stay diversified in the market, let alone throughout your life!

  • Great post! I have to agree with you – some investments have value beyond financial. My college degree was the best investment decision I’ve ever made. Being well l paid is one thing, but having a job that I love makes it all worth it.

    I’ve made a couple of loans on Prosper, even though I’m mainly a borrower. It made me feel good to help out people that were stuck in bad situations.

    And ditto on blogging. The things I’ve taken in from the blog community are far more valuable than the financial return alone.

  • That is why I like to take a holistic look at my investments sometimes. Real estate including your primary residence can be something that is very easy to be overweighted in without realizing it.