Despite my apparent posts to the contrary, I think it is OK to diversify, but only when you have reached your financial goals (i.e. Your Number) – or, are damn sure that lower/diversified returns are going to get you there – and are transitioning to Making Money 301, when you are trying to protect your assets.
Even then my perspective of what constitutes ‘diversification’ is probably very different to what common wisdom would suggest. However, today, I want to look at a different kind of diversification …
Let’s start by looking Bill’s comment:
I guess you are trying to espouse that one must FOCUS on ONE thing which creates the abundance of ACTIVE income and then leverage further to create PASSIVE incomes via real estates…
Focus is indeed a great way to build wealth … you pick something that will give you the best return (at least, one that you believe in your heart-of-hearts) and ride that sucker until it proves otherwise!
You don’t need to diversify your wealth-building activities: it can halve the outcome – or worse, you actually double your chances of a (partial) failure!
But, when it comes to passively investing the proceeds diversify away!
Don’t leave all of your profits in the investment that is generating the wealth – here’s just one example:
You have a business operating out of a shop, warehouse, or office: a simple way to diversify is to use the income from the business to buy the premises.
If you ‘go under’ you can simply re-rent the premises to somebody else (if you buy well, and hold a cash buffer against such a disaster). And, if you sell the business, you have tenants – with a business that you could always take over again, if they bust!
Similarly, if you have any kind of business (or job, for that matter … which is simply a business where you are selling your time on a pre-determined contract on a semi-exclusive basis) you invest some of your income.
But, this is an example that is NOT diversifying: you have a business operating in one geographic area and you reinvest the proceeds of your business into opening up new locations. You will find that your empire can unravel due to some unforeseen circumstance as quickly as it was created … then, where is your backup.
I started real-estate investing, using the income from my businesses before I started expanding my businesses internationally. I already all-but-completed my 7 million dollar journey before I even had a business that was able to be sold (eventually) … and, I did it all on the same income that any reasonably-well-paid professional can claim.
The advantage of this kind of diversification is that I had built a backstop for my business, in case my expansion plans backfired.
No the diversification that I am talking about is to:
1. Focus on one area in which to create income, and
2. Focus on one other area in which to build (passive) wealth.
I would be happy with just one business and one – bloody big – office building. To me, that’s diversification enough!