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. True diversification includes investment in areas other than the stock and bond market.
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, true diversification can be found in other ways. 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 true diversification.