“Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.”
You may be wondering why a blog that focuses on being an alpha male is concerned with financial matters (see my previous post on the importance of keeping debt low). I believe that financial health is extremely important. I have recently watched a YouTube documentary called Wham Bam Thank You Scam! This documentary is about an Australian who invested $150,000 with a fund manager who turned out to be fraudulent. He flies to Bangkok to find the fraudsters. It is heartbreaking to see the desperation and futility of his search. Documentaries like these strengthen my belief in the value of diversification.
It is easy for people to look down upon the victims of fraudsters and accuse them of not researching enough, but the reality is that there is no consistent way you can reliably know if an area you park your cash is safe. Most people judge the trustworthiness of an individual or institution by the prestige, niceness of the website, how professional the people who work in that organization work, and so forth, but it doesn’t take Einstein to realize that these superficial cues are not always reliable indicators. Highly regarded money managers have turned out to be scam artists, for example, Bernard Madoff. Highly regarded institutions such as the prestigious and powerful HSBC have been found guilty of corruption and money laundering. It is great to research an investment and do your due diligence, but research is not enough because research is flawed. We can look with our own eyes, but appearances deceive. Research will only take you so far in protecting your wealth, but diversification will bring you much further.
Just how far should you diversify? In my opinion, go as far as possible. I have multiple financial institutions and within each financial institution there are multiple funds and multiple accounts. Never put too much in any one institution or account. Trust no one fully.
When spreading wealth across multiple investments, make sure the different areas you park your cash are actually different. For example, if you invest in BHP shares using two different brokers, you have diversified across brokers but not across companies. Better to use one broker to buy BHP and the other to buy something else, such as CBA. As much as possible, spread your wealth across different types of investments.
The biggest downfall of diversification is the complexity of remembering everything you have. Having to deal with multiple organizations can be difficult and confusing, but I believe it is worth it. You cannot afford not to do it. Make sure you hire a registered tax expert to do your taxes for you. Unless you are an expert, you will need it.
A way I keep track of my investments is to always invest in investments that pay an income (called a “distribution”) to my main bank account. This way when an investment makes money and puts it in my bank account, I see it on my phone and I am reminded that this investment exists. I never follow a dividend reinvestment plan or invest in anything that produces no income (for example, physical gold produces no income). Some highly regarded shares produce no income either, for example, Google and Berkshire Hathaway have not paid dividends so far. These aren’t necessarily bad investments. I just personally like to receive reminders that my investments are working and that they exist.