Do you know who is getting wealthy from diversification?
Wall Street and the financial advisors whose pockets get fat from trading volume spurred on by investors bought into the diversification lie.
Diversification will help investors achieve exactly what diversification is meant to do – and that is to minimize risk. Dictionary.com defines diversification – in the investing context – as investing in a variety of securities so that a failure in or an economic slump affecting one of them will not be disastrous. That doesn’t sound like a strategy for getting wealthy, but like a strategy for not getting poor.
Diversification is a strategy for preserving wealth, not creating it. When financial advisors tell investors to diversify, all they’re telling investors is to spread out risk – the old not to put your eggs in one basket analogy. It’s disaster planning, not wealth planning.
But, what if, instead of diversifying away risk and along with it returns, we could reduce it and increase our returns? There’s a way, but it doesn’t involve diversification in the traditional sense of investing a little into everything – including things we don’t know a thing about.
Apple, Inc., Amazon, Inc., and Alphabet, Inc. (Google) are three of the biggest companies in the world by market cap. They all got to the top of the business world by concentrating on one particular area of commerce that they were good at – Apple with consumer electronics, Amazon with e-commerce, and Google with searching.
Now within these areas of commerce, all three companies have diversified their offerings, but they haven’t strayed too far from their core specialties. Apple has expanded its mobile device offerings beyond iPhones to iPads and Apple watches; Google has expanded search from web browsers to in-app search, and Amazon has acquired other e-commerce sites such as zappos.com.
When Apple, Google, and Amazon have strayed from their core competencies, the results haven’t been pretty. Remember Apple’s foray into social media with Ping? I didn’t think so because it didn’t last long. Amazon failed at launching its smartphone – the Fire. Google also failed at social media with Google+.
Do these companies diversify in the Wall Street sense? Do they invest in soda, pharmaceutical, insurance, oil, and automobiles for the sake of diversifying? Absolutely not. Their goal isn’t to maintain stock value – it’s to grow it.
These companies practice a brand of diversification that makes them rich – intra-asset diversification – concentrating on one particular core competency but investing in multiple assets within that core competency.
Diversification may preserve wealth, but concentration builds wealth.
– Warren Buffett
To me, that means focus on what works. Diversifying across asset classes (inter-asset diversification) – many of which investors have no clue about – dilutes the winners with losers. Why do that if you’ve already found a winner?
So what options do investors have beside blind diversification? Ultimately, we have two options.
- One option is to invest in an array of assets we don’t understand to lower risk through diversification. This is inter-asset diversification.
- The other option is to invest in one proven asset class (a winner) that we understand and invest across different subsegments within that class to have more control over our risk-taking – in other words, taking risks into our own hands. This is intra-asset diversification.
The second option – intra-asset diversification – is the only option for creating wealth.
If you’re going to focus on one investment class, you can’t do much better than real estate.
As an alternative investment favored by the wealthy and large institutions, real estate has historically offered above-market risk-adjusted returns necessary for building long-term recession-resistant income and wealth.
Real estate provides higher risk-adjusted returns than other investment classes because it lends itself ideally to intra-asset diversification – diversification across subsegments, price levels, and geographic locations.
For investors who do their homework and understand risk in the real estate class, they will learn to minimize this risk while enhancing returns either directly or as most ultra-wealthy investors prefer, by leveraging the expertise of others through a private investment fund.
- Private investment funds provide time-constrained investors the opportunity to invest in a winning asset class that minimizes risk while providing high returns.
- Private investment funds allow investors to diversify intra-asset by either investing in a private investment fund that diversifies across many assets within the real estate class or by investing across several funds.
Either way, the investor will be able to achieve intra-asset diversification – the only type of diversification that will make investors wealthy.
If we as humans lived until we were 300 years old and worked until we were 275, diversification might make a little sense. Diversification would allow us to preserve the wealth we built up for 250 years and have a little time to enjoy that wealth. But, most of us won’t live even until the age of 100, so we don’t have that luxury.
If we want to build wealth and enjoy it in this lifetime, inter-asset diversification is not the way to do that.
Intra-asset diversification in a proven asset class that provides high risk-adjusted returns is an ideal way to do that.
Click here to learn more about private investments.
Investing for Growth,
Michael Foley
