Investors can lower risk and increase exposure with smart diversification. By making smart diversification fit personal circumstances, investors meet needs, goals and exposure to greater market opportunity at low risk.

Money Making Investing Success, Lesson 12, introduces smart diversification and how smart investors use it to manage risks and market exposure. Links at the end guide you to related content if you want to learn more.

What’s in this lesson for me?

Smart diversification is a tool used by superior investors to improve their investment returns at lower risk. By learning and using this tool you gain have one more skill of a superior investor.

Diversification can kill your portfolio!

Smart investors use smart diversification to reduce portfolio risk but must be careful not to kill performance. Diversification means not having all your eggs in one basket to keep risks as low as possible, while holding the best opportunities for income and growth.

Diversification is a good thing but it can be overdone. Too much diversification can make a portfolio under perform the market without providing greater risk reduction. Under the diversification flag, financial advisor can make poor investment recommendations. Sometimes a tempting commission gets advisors to forget who they should be working for. Poor execution of a diversification strategy can definitely harm portfolio performance.

Diversifying well requires knowing how to make diversification choices and selections that give good market exposure while keeping risks manageable. Investors can tailor smart diversification to fit their personal diversification circumstances, needs and goals with good income and growth holdings. Managing diversification well is an important part of the process of increasing investing opportunities.  

Using Smart Diversification is the best way to deal with all personal diversification issues. Be aware of your diversification choices and have a plan. A diversification plan, helps you meet financial security and retirement independence goals at the least risk.

Always remember rule one

Recall Warren Buffett’s rule one, “Don't lose money!” Too many financial advisors and investors misuse diversification in the name of risk reduction. They can seek to cut risk and not lose money. However, mindless one size fits all diversification decisions can make sure portfolio performance is mediocre to poor!

Fund companies offer aggressively promoted balanced funds as the safe, diversified approach, for any and all. Such funds get sold as the answer for mature professionals at the top of their game and earning power. The same fund and approach is also offered to stay at home Moms and housekeepers, aspiring athletes, recent graduates and elderly retirees too! One diversification approach for all! That gives no consideration of the different circumstances for each person.

Amazingly, funds offered as the diversification answer get offered as the answer for you too! Wow! One size fits all! With no consideration of how you earn your living, where you live or your stage of life, investors get offered the same fund.

Fund based diversification has high costs!

Large funds, promoted as an easy way to diversify, are indeed diversified. Diversified to the point that such funds or your portfolio managed in the same way, can not possibly outperform the market!

Once investors pay all costs, the net performance consistently under-performs the market! Many funds carry 70 or more positions. The large number of positions held, ensures diversification at the cost of limited portfolio performance!

That is expensive and not smart diversification.

Smart diversification takes some thought

More sage advice from Warren Buffett, “Wide diversification is only required when investors do not understand what they are doing.”. How, where and what we use to diversify and control risk, requires us have a smart process.

Learn and use smart diversification. Smart diversification helps smart investors become superior investors. You can outperform the market while being safely diversified. Smart diversification means considering the specific situation of each investor. Then tailoring diversification to fit that personal situation.

We want good investments and good performance without overexposure to any one sector or risk. We want good upside and control of our downside.

Smart diversification is a key to taking control of your financial future. Diversification is one tool that you can use to help control your financial future.

Diversification hedges, or partly insures, that you have more control of financial and economic risks in your life. Done well, it minimizes the impact of bad news or the downturn of one investment on your economic life. It attempts to position your investments, so a setback in one investment, does not financially devastate you.

Smart diversification process

Superior investors use smart diversification as a process to reach the best strategy for them. Much of it is an exercise in personal awareness. With that awareness in place, you can go ahead and confidently diversify well.

Smart diversification is about you:

First: look at your big picture

Second: consider your investment types

Third: consider your geographical factors

Four: consider your sector selection

• Think and use Smart Diversification to lower investment risks

• Smart diversification must fit your situation and fix on your goals
  

Building financial security and retirement independence is a very personal process. Just as your life is unique and different, you must craft a financial plan that fits you. It is different for you and each other individual investor. Your plan must consider, in financial matters, where you are and where you wish to go.

Portfolio management and diversification

Smart investors striving to become superior investors need to use Smart Diversification. Smart diversification helps you outperform the market while keeping risk under control. When either, using an excellent financial advisor or running their own portfolio, superior knowledge is common among all superior investors. Superior investors know and use Smart Diversification.

First: look at your big picture

We begin the Smart Diversification process by looking at our personal big picture. We must know where we are. Only then can we know which direction takes us to our goals. As always, start exactly where you are; consider your own financial situation and risks.  

Take a personal big picture. Take a holistic view of your financial and economic life. For yourself, answer the basic question, "Financially, where am I?"

Your brother, sister, parent, child, friend, neighbor and even your partner, may have very different attitudes and points of view.

Your point of view is the one that matters to your plan. This important first step is about you and just about you. Understand where your money comes from. Think about what could put that at risk.

Diversification in investing

We are discussing diversification of your investments. However, to do that well, you need to first consider the parts of the economy and all the financial risks you have in your life.

Someone living and working for the company in an industry built community has a very different financial exposure profile than a civil servant employed in a government town. A teacher with portable job skills and opportunities has different financial risks than a mortgage broker living in the same rural agriculture based community.

Their risk exposure differs so their diversification and financial plans also must differ. To develop your own plan, begin by considering your own big financial and economic picture. Identify your exposure to both risks and opportunities.

Personal big picture considerations

Assets and liabilities

List your assets (your stuff, like house, car, bank account, savings, investment account etc.) and liabilities (what you owe, debts including credit card, loans, mortgage(s) and any other obligations you have). That tells you where you are beginning, in a financial sense.   

Skills and Education

What employable skills and value do you offer? What makes you economically valuable? How transferable are you? This gives you the opportunity to consider how your package of skill, ability, knowledge and education could improve your employment or income.

Income

Investors must make regular contributions to their future. Realistically review your income and what you can do to improve it. How much more can you give to your future?

Employment

How secure is your employment? Is there anything you can or want to do about improving it? 

Employer

Consider how secure your employer is in both the industry and in the market. Should you be looking for a better situation?

Industry

How secure is your industry? What competitive threats are there? What economic forces pose threats? Should you continue working in that industry?

Community

What is the economic base of your community? What economic forces could hurt that economic base? Is this where you want to live your life?

Family and Personal Relations

Ignore the relationship related financial risks at your grave future financial peril! Be realistic, be honest. If it needs fixing or changing, get to work on doing something about it.

Identify and address the issues

An honest and complete big picture review always uncovers problems and challenges. Acknowledge the issues to yourself. Then address them. Come up with a plan and get to work on making it happen. It is you future. Make it great!

If you design cars, sell dresses, program computers, truck gravel or do payroll for a sawmill, you know the organization must prosper to keep your paycheck coming. Think about the risks of the business and your industry. Know the risk exposure of your income. Know what parts of the economy affect you most.

Identify community economic risks

When considering your community, learn what economic activity drives the place. Where does the money come from?

Every community, everywhere has an economic base and risks associated with that base. Identifying that base and the risks gives you useful knowledge. You can use that insight and the Smart Diversification process to lower your risk.

A fishing community or other resource town is very different from a transportation hub or a capital city. As a manufacturing center differs from a technology based region or a local economy dependent on an armed forces base differs from a seasonal holiday resort community.

Each community and the people living there, have differing financial risks. Identify the economic base of your community. Knowing that improves your awareness and your ability to make Smart Diversification choices.

Living in an oil town, working for the oil company, with your portfolio holding shares in the same company along with mutual funds that have 30% exposure to the oil patch and energy, is not diversified! That is high risk! To address that and every other situation, we continue in the next post in this series, the Smart Diversification process. Smart Diversification can help every investor meet the need for personal diversification.

Why this lesson matters

Knowing and using smart diversification helps you become a superior investor improving your investment returns while lowering risks. Learning and using this tool gives you an important skill of superior investors.

Key takeaways from lesson 12,
Smart investors use smart diversification

Investors can lower risk and increase exposure with smart diversification. By making smart diversification fit personal circumstances, investors meet needs, goals and exposure to greater market opportunity at low risk.

• Careless diversification can hurt portfolio performance.
• Large funds may offer expensive and poor diversification options.
• Smart diversification is a thoughtful personal process.
• Smart diversification looks at:
  • your big picture
  • your investment types
  • your location factors
  • your investment sector choices
• Smart diversification must fit your situation and fix on your goals.
• Personal big picture factors must be considered:
  • assets and liabilities
  • skills and education
  • income
  • employment
  • employer
  • industry
  • community
  • family and personal relations
• Smart diversification means address and resolving any issues.

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Smart investors use smart diversification

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Making Money With Investing Success,
lesson links:

Key investing success lessons Lesson 1

Top 4 ways to find money to invest Lesson 2

Time to invest or time for an advisor Lesson 3

Low costs double returns as ETFs beat mutual funds Lesson 4

4 Successful investor traits Lesson 5

Small investors have advantages Lesson 6

Avoid 6 investing sins Lesson 7

Investment impatience destroys wealth Lesson 8

3 Yeses or no investment Lesson 9

Investing can be fun, interesting and slow Lesson 10

Warren Buffett explains gold Lesson 11

Smart investors use smart diversification Lesson 12

Next suggested course:
Investments That Make Money Work

Have a prosperous investor day!

Bryan

White Top Investor

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