This post Rich Dad Scam #8: “You Need a Diverse Portfolio” appeared first on Daily Reckoning.
This issue is the final in the Rich Dad Scams series—scams designed by the rich to keep you in your place.
They are the “rules” you’re supposed to follow that will keep you locked as an employee, barred from getting rich… all while helping the rich get richer.
The reason so many people buy into these scams is because some of them, like working harder and saving money, used to be viable. If you followed them, there was a reward.
But not anymore.
As we’ve seen in other scams living below your means and saving your money, the Rich Dad Scams I’ve identified keep you from truly putting your money to work. They keep you from turning your money into more money.
In other words, they keep you poor.
Today, we’ll take a look at Rich Dad Scam #8, “Invest for the long term in a diversified portfolio of stocks, bonds, and mutual funds.”
The Investment Illusion
Have you ever heard this advice: “Invest in a diverse portfolio of stocks, bonds, and mutual funds”?
Seems like good advice, doesn’t it? What could possibly be wrong with spreading your risk among a number of different investment vehicles?
If there’s anything to be learned from the last few years of financial mess, it’s that nothing is guaranteed. And that includes all the long-term investments that your financial planner will encourage you to buy—again, stocks, bonds and mutual funds.
It’s worth noting that financial planners didn’t exist until about forty years ago, when people were forced to take control of their own retirement funds through vehicles like the 401(k).
Financial planning is an industry created by the banks to make money off the financially illiterate.
It takes only thirty days of training to become a financial planner.
You have to go to school for more than a year just to become a massage therapist.
Nearly every financial planner will tell you that in order to be financially secure, you must diversify. By this, they mean to invest in stocks, bonds, and mutual funds.
But this is not true diversification.
There are actually four asset classes: paper, real estate, commodities, and business. A truly diverse portfolio would have stakes in all or most of these.
It’s diversification in only one asset class: paper assets—the class where banks make big money in the form of fees.
Virtually ignored are the other asset classes.
The Diversification Trap
But, you say, my financial planner helped me plan wisely. We invested in lots of different things, so that if one company’s stock or one mutual fund takes a hit, there are others that will go up.
This is one of those scams that make sense on paper.
Of course, the more spread out you are, the more protected you are from losing money.
Except for the fact that everything you’re invested in is still on paper…
It’s based on the same fragile economy, and the same investment model. When the stock market goes down, it goes down everywhere, not just in certain places.
Investing in Microsoft and McDonald’s won’t make any difference if the market tanks and everything goes down across the board.
Widely investing in different mutual funds spreads that risk around even more, but the risk is still the same and the hit will be the same when things go south.
True diversification is investing across different asset classes, not different stocks.
This holds true with any of the asset classes. If I’m invested in condos, apartments, and houses, my portfolio looks diverse, but they’re all still real estate assets. So I have real estate assets, commodities assets like gold and silver, business assets like my companies, and yes, I have some paper assets as well. But I know they’re not going to make me rich.
Taking Control
The real issue here is that by buying paper assets at all, you’re putting control of your money in someone else’s hands.
A CEO makes a bad decision, and you’re left holding the bag for his mistake when the stock drops.
The only control you have over paper assets is to sell them. Holding onto them, you’re just playing a waiting game and crossing your fingers. And it’s even worse if you put those paper assets into a 401(k), you have even less control, they’re locked in, and you’re penalized for taking those funds out or borrowing against them.
True diversification requires financial intelligence, which comes from financial education.
If you don’t have the desire to increase your financial intelligence, then by all means continue using your financial planner and investing in only paper assets, as those investments are set up so that even a monkey could do them.
If, on the other hand, you want to be rich, I encourage you to ignore Rich Dad Scam #8, “Invest for the long term in a diversified portfolio of stocks, bonds, and mutual funds,” and instead increase your financial education and begin working towards true diversification.
Safety comes from diversification of all four asset classes, but totally equal holdings in all four areas is not necessarily what I’m advising…
If you want to be rich, you must learn to focus.
Why Diversification Can Be Bad Advice
Again, what most people consider as diversification isn’t really diversification. Rather it is spreading your money across one asset class.
Beyond that, diversification is a zero sum game. Gains in one class offset loses in another. Sure, it can be safe, but rarely does someone become wealthy by diversifying. As Warren Buffet says, “Wide diversification is only required when investors do not understand what they are doing.”
The most successful investors don’t diversify.
Rather, they focus and specialize. They get to know the investment category they invest in and how the business works better than anyone else.
For example, when investing in real estate, some investors focus on raw land while others focus on apartment buildings. While both are investing in real estate, they are doing so in different ways.
When Diversification Makes Sense
So why do financial advisors …read more
From:: Daily Reckoning