Applications for the new $7 Million 7 Year Wealth System Guided Learning Experience are now closed. Thanks to all of those who applied … and, congratulations to those 30 who made it!
I’m not going to encourage my other readers to join, as I can’t see the point of paying $97/year for something that you could have got for free (well, for $1 a year). Anyhow, no advertising allowed on this blog … and, that even applies to me!
Instead, I hope that you will keep reading this blog, and that it will inspire and help you to make millions the good, ol’ fashioned way 🙂
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Yes, I am well and truly diversified …
… and, it sucks!
Here are my current holdings, roughly:
$5.0 million – House in Australia
$1.5 million – House in USA (soon to be a rental)
$2.5 million – Cash in Bank/s
$1.0 Stock in UK (actually, 70% has just been converted to cash)
$1.0 million – Equity in 5 condos
$1.0 million – Equity in two development sites (could be up to $3 million – $6 million once permits are issued)
$1.0 million – Value of business (I still have a finance company running on ‘auto-pilot’)
… aside from the fact that I’ve over-invested in my Aussie house [AJC: see this post for the problem and how I intend to fix it], you can see why I am not happy:
– Too much in cash,
– Too much overseas, in chunks too small to be meaningful
– Too many ‘small’ chunks of $1 million
Ideally, I would like to bring some of those small chunks together, merge them with my cash (like so many drops of mercury) and do something useful with them …
…. by ‘useful’, I mean plonk as much as the bank requires into my two development projects, then use the proceeds to buy as many investment properties in the $1 million to $3 million price range that I can find, as long as the net result is free cashflow of $500k+ p.a.
Nowhere here do you see me saying:
– 30% in cash,
– 30% in real-estate,
– 30% in stocks
– 10% in venture capital
Mine will look more like:
– 80% – 90% real-estate (albeit, over a number of properties, rather than just one big’un),
– 5% – 10% cash for contingencies (up to approx. 2 year’s living expenses or $500k to $1 million, whichever is the lesser)
– 5% – 10% for ‘fun projects’ (e.g. venture capital investments).
Why so much in RE?
[AJC: It doesn’t have to be RE; how I invest my money is not how you should invest yours … but, the principle of NON-diversification is what’s important, here. And, I should clarify that, too: for you, non-diversification could be 95% in TIPS; 80% in AN index fund; 90% in just 4 or 5 stocks … in other words: it means, avoiding spreading across asset classes]
I can’t find the online reference, but Warren Buffett was asked at the 2008 Berkshire Hathaway AGM (which I attended, so I am paraphrasing exactly what I heard, here) how much of his net worth he would place into one position (Berkshire Hathaway doesn’t count, because it’s really a conglomerate).
Warren said that his biggest problem right now is that his investment war chest is so large that he is forced to buy many investments, however, he did point out that he was very happy in days long gone, when his investment in AMEX comprised nearly 60% of his net worth.
Charlie Munger (Warren’s long-time business partner) said that he would be equally happy to have close to 100% of his net worth in just one outstanding investment.
BTW: Charlie is a real ‘character’; short on words … long on wisdom!
Having sat on both sides, I can tell you that – right now – I am NOT happy being so ‘diversified’ … it annoys me, and I feel hamstrung in that I can’t bring my full financial weight to bear on any project.
But, each to their own … it’s just that certain rich peoples’ “own” = non-diversification 🙂
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Adrian J Cartwood is on FaceBook … come and be friends!
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Adrian – a question on how “diversification” should be measured. Most people measure it by the amount of equity they have in a position. My personal view is that this is actually a bit misleading as it understates exposure to returns (good or bad) on geared assets.
To use a very simple example, if a portfolio consists of $1M in cash, a $2M property partly funded with a $1M loan (i.e. $1M equity in the property), it is more useful and meaningful to say that 2/3 of assets are in property than to say that 1/2 of assets are in property.
Thoughts?
I’ve always believed that diversification would weaken your results.Why place money in your number 10 choice, rather than putting that money into your number 1 or number 2 choice?
I Like your question trainee investor. Cannot wait to hear Adrian’s point of view on that.
@ TraineeInvestor – Interesting point; I think “it is more useful and meaningful to say that” 2/3 of MY TOTAL EXPOSURE is to real-estate.
@ Steve – Spot on!
Steve,
>Why place money in your number 10 >choice, rather than putting that money >into your number 1 or number 2 choice?
Because you may be wrong? If the #10 outperforms your #1 choice wouldn’t you rather have invested some in both? If you are never wrong, then it doesn’t make any sense, but I personally make too many mistakes to put all my money in one or two investments.
Adrian,
I’m a bit confused… I thought you reached your number and were in MM301 mode- trying to maintain it.
Shouldn’t MM301 strategies use diversification to reduce risk? Isn’t it risky to concentrate your investments when you don’t HAVE to?
-Rick
@ Rick – That’s the point; I am trying to move into MM301, but I am too diversified for my likes. Not to mention, I took a hit in the UK (stocks), Aus (stocks) and US (RE) due to the GFC (even though, as you can see from this post, I am still over my $5m5y original Number / Date and my blog-titled $7m7y Number/Date) …
… just one of the reasons that I have decided to do two very un-MM301 development projects first.
Also, when you reach your Number by Your Date, you don’t HAVE to actually retire … even though I might end up regretting my sudden MM201 urge 😉
Adrian. Why do you say you may end up regretting your sudden MM201 urge???
If you’ve planned this , and researched it ,and discussed it with others who have done the same thing(or similar) you should do alright.From what we have3 been reading about your recent R.E. Purchases, it doesn’t sound as if you’ve rushed into anything,which many people do out of desperation to make back loses.
Rick: it matters not if I am wrong . If I due my due diligence and feel I have made the right choice, I want to place as much in that choice as I can comfortably afford to do. If I end up being wrong , that is ok too ,since you have (hopefully place a stop loss) to get you out early so you have something left to try again..Its not so much about being right all the time as it is about controlling your losses , and letting your winners run..
RISK IS CONTROLLED IN A NUMBER OF WAYS. first IS DOING YOUR DUE diligence,to make certain your getting the right stock(or real estate) at the right price. Second is to control emotion so you don’t stay too long if things go against you.Third, is not listening to hype and buying on a sexy story, but only on true value.Forth, is keeping an eye on your stock to know when things change. Situations can change and do all the time.Even Warren Buffet makes bad choices form time to time. But he lets his winners run, and if he discovers he has made a bad choice, he doesn’t wait to lose a ton before getting out.
Rick, let me put it to ya like this. I like to test my effectiveness, so I do it with play money. I use a web site that lets me use pretend cash to make stock purchases. I have a dozen or so stocks. Some of them I have let ride (just to see what will happen). I have lost a pretty good sum on those. But others, I have let ride till I felt they were at their true value , then sold for a 50 % return in 2 years or less.I’ve also had a few return 100% or more in less than a year.I of course sold those for a nice 100+ return.
I’ve done the same in real trades as well.
splitting your assets splits your attention. “pick one thing and do it well” — steam whistle brewery.
Great article here! I am a young guy just learning about investments and never knew that non-diversification is the way that the rich make money. Very mind boggling to me… it’s such a huge risk, is it not?
@ Gabriel – Depends upon your goal; to me NOT making $7 million in 7 years was a huge risk … making that sort of money is nigh on impossible if you diversify.
Gabriel,
Adrian is right here. Diversifying,can lower your over all return,where as,investing in fewer things over all can actually increase your returns. The only risk is in not doing sue diligence before the investment. I mean you have to look at not only what can go right,but what can go wrong and how can I reduce the likelihood of that happening or the likelihood of lose if it does happen.
lets look at an auto accident. you can drive safely, but you can never eliminate the fact that a careless driver will hit you,but you can be prepared with insurance, and practical driving habits. Same with investments. You can’t prevent stocks or Real Estate from going in the wrong direction, but with careful planning, you can reduce your loses.So No, investing in 1 2 or 3 things is not the risky thing most want you to believe it is. investing in too many items is much more risky in my opinion.