The Wealth Code - How the Rich Stay Rich in Good Times and Bad
2010 Finalist: Independent Book Awards - Personal Finance
2010 Finalist: Independent Book Awards - Personal Finance
Chapter Two
The Best Portfolios Are Mixtures of Many Different Asset Classes
Take for instance the word "diversification." You may have been told that if you have lots of stocks, bonds, and mutual funds, you are diversified. In actuality, your portfolio has a lot of only one asset class.
There are many asset classes to invest in, and the best portfolios are mixtures of many different asset classes.
Basketball is a great way to demonstrate the concept of a True Asset Class diversified portfolio.
Does it seem a bit unfair that in the Olympics the USA basketball team has the best players from the NBA all working together? By cherry picking the superstars from each team—knowing their statistics, their abilities, and track records—and crafting them together to make a super team, Team USA fields the most competitive team available.
I was watching a game between USA and the Canada in the 2007 Summer Olympics; the final score was 113 to 63. Pretty close compared to other matches the USA team had already played. Watching the game, players would go in and out. At one point Kobe Bryant, the superstar from the LA Lakers, took a five-minute break. Lo and behold, the score became more and more imbalanced, even though one of the greatest players in the NBA was not on the court. Why? Because Lebron James, Dwight Howard, Jason Kidd, and others were still playing, and each was a superstar in his own right. I would argue that if Kobe Bryant had broken his leg in this game, Lebron and the rest of the guys would still have won and eventually would still have captured the gold medal.
If Kobe broke his leg during the regular season with the Lakers, it would have a devastating outcome for his team. Kobe is the all-star of his team, but on the Olympic team, he is one of many all-stars. The Olympic team would have a minor setback, at best.
The difference in skill between the Lakers and the all-star Olympic team is the same as the difference between a portfolio that got crushed in 2008 and one which survived the storm and actually grew because of true diversification.
This is the philosophy of our group. We have built our own team of financial all-stars, who excel in many areas of wealth building through true asset class diversification.
Diversification is a word that means different things to different people. It is supposed to make people feel better about their investments, that they are doing the right thing. The problem is the viewpoint of the person promoting the idea. As previously discussed, most financial advisors view the world in two colors: stocks and bonds.
I will proceed to show you one prevalent view of diversification and then my own view. One viewpoint of the financial world looks like the teeter-totter below:
Take for instance the word "diversification." You may have been told that if you have lots of stocks, bonds, and mutual funds, you are diversified. In actuality, your portfolio has a lot of only one asset class.
There are many asset classes to invest in, and the best portfolios are mixtures of many different asset classes.
Basketball is a great way to demonstrate the concept of a True Asset Class diversified portfolio.
Does it seem a bit unfair that in the Olympics the USA basketball team has the best players from the NBA all working together? By cherry picking the superstars from each team—knowing their statistics, their abilities, and track records—and crafting them together to make a super team, Team USA fields the most competitive team available.
I was watching a game between USA and the Canada in the 2007 Summer Olympics; the final score was 113 to 63. Pretty close compared to other matches the USA team had already played. Watching the game, players would go in and out. At one point Kobe Bryant, the superstar from the LA Lakers, took a five-minute break. Lo and behold, the score became more and more imbalanced, even though one of the greatest players in the NBA was not on the court. Why? Because Lebron James, Dwight Howard, Jason Kidd, and others were still playing, and each was a superstar in his own right. I would argue that if Kobe Bryant had broken his leg in this game, Lebron and the rest of the guys would still have won and eventually would still have captured the gold medal.
If Kobe broke his leg during the regular season with the Lakers, it would have a devastating outcome for his team. Kobe is the all-star of his team, but on the Olympic team, he is one of many all-stars. The Olympic team would have a minor setback, at best.
The difference in skill between the Lakers and the all-star Olympic team is the same as the difference between a portfolio that got crushed in 2008 and one which survived the storm and actually grew because of true diversification.
This is the philosophy of our group. We have built our own team of financial all-stars, who excel in many areas of wealth building through true asset class diversification.
Diversification is a word that means different things to different people. It is supposed to make people feel better about their investments, that they are doing the right thing. The problem is the viewpoint of the person promoting the idea. As previously discussed, most financial advisors view the world in two colors: stocks and bonds.
I will proceed to show you one prevalent view of diversification and then my own view. One viewpoint of the financial world looks like the teeter-totter below:
This example of diversification includes stocks, bonds, mutual funds, variable annuities, and CDs, which I jokingly call Certificates of Depreciation or Disappointment. More on that later.
If I were a carpenter and I had a business building one-legged dining room tables, it's easy to imagine that these tables would fall over due to instability at the slightest push, and my business wouldn't last very long. No one would be silly enough to buy a one-legged table because ultimately it would not do the job as intended—to provide a stable platform for eating.
If I were a carpenter and I had a business building one-legged dining room tables, it's easy to imagine that these tables would fall over due to instability at the slightest push, and my business wouldn't last very long. No one would be silly enough to buy a one-legged table because ultimately it would not do the job as intended—to provide a stable platform for eating.
Stocks, bonds, mutual funds, and variable annuities represent essentially one asset class, or one leg of a multi-leg financial table. The other legs are asset classes that are independent of the stock market. Examples include real estate, oil/gas programs, collateralized notes, equipment leases, rare coins, and fixed annuities, to name a few. These are called non-correlated investments.
The problem with Wall Street's single leg viewpoint is that no matter how many parts of this one leg you put together, you still have only one leg on your financial table. If that leg fails, your table will come crashing down.
Wall Street can be compared to the carpenter building unstable one-legged tables, although this narrow approach is all that most groups offer the majority of investors. There are several reasons why the vast majority of investors invest all their hard earned money in one legged tables: It's all they know, it's all their advisors know, and these are the opportunities all the large firms, holding their money, will provide for them to invest in.
If you go to the grocery story very hungry and the store only has apples and oranges for sale, guess what? You are going to buy apples and oranges. You don't have any other choice, since you choose to shop at a grocery store with limited options. That is Wall Street's version of "diversification," a one-legged table built of stocks, bonds, mutual funds, and variable annuities. Although variable annuities do represent another leg on the table, the foundation for variable annuities is still the stock market and thus is essentially the same leg.
The problem with Wall Street's single leg viewpoint is that no matter how many parts of this one leg you put together, you still have only one leg on your financial table. If that leg fails, your table will come crashing down.
Wall Street can be compared to the carpenter building unstable one-legged tables, although this narrow approach is all that most groups offer the majority of investors. There are several reasons why the vast majority of investors invest all their hard earned money in one legged tables: It's all they know, it's all their advisors know, and these are the opportunities all the large firms, holding their money, will provide for them to invest in.
If you go to the grocery story very hungry and the store only has apples and oranges for sale, guess what? You are going to buy apples and oranges. You don't have any other choice, since you choose to shop at a grocery store with limited options. That is Wall Street's version of "diversification," a one-legged table built of stocks, bonds, mutual funds, and variable annuities. Although variable annuities do represent another leg on the table, the foundation for variable annuities is still the stock market and thus is essentially the same leg.
