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Diversification Vs Repeat what you are good at
- Thread starter devank
- Start date
I agree that risk management is the crux of the matter. Over exposure in an unkind market CAN bring any master plan undone, particularly if the cash flow and buffers are not healthy. Over the past 10 years I have been mentored by a particularly talented hedge fund consultant from the US and the number one thing he says to his students over and over is "manage your risk".
Should mention I am new to Somersoft (Hi!) and am a close referral partner of Rolf Latham on the financial planning side. I hear what people are saying about financial planning and actually agree with some of the comments, sadly a lot of the industry is little more than product pushing but this being said, don't make the mistake of tarring the entire industry with the same brush. As someone commented there are good ones out there! Yes, financial planning generally has a more conservative, traditional view but that is entirely appropriate for most people's risk tolerance. Also bear in mind the financial planning industry is heavily bound by regulation and compliance and this tends to restrict the available avenues. My view is that financial planning foundations are not based in investing or which asset class to choose - I have a strong conviction proven over many years that the foundation of wealth is creating through successful cash flow planning, big picture asset structuring and secure risk management. It's less about your investments and more about your structure and habits. Not all financial planners preach diversification and managed funds.
Non-diversified, accelerated, targeted strategies based on individual skills and knowledge are fine providing you know what you are doing and manage the risks appropriately. For example, although in my journey I have done almost any transaction you could dream of in property, stocks, bonds, warrants, options, futures, currencies commodities etc, personally my preferred 'focussed' wealth building activity is active day (short term) and position (longer term) trading in futures, stocks and currencies and to execute this I get out of bed at an ungodly hour every night to trade a couple of hours at the US market open as this is when the futures markets are most active. I make a large return very quickly doing this but it is not something I want to continue to do forever as it is mentally draining, takes a lot of technical analysis work and disrupts my sleep. As part of my risk management and accumulation plan I am constantly diversifying profits from trading in to other asset classes. This also has another benefit in that these assets will generate income without the labour and intensive mental game required for trading.
We are here because we are all motivated and active in seeking wealth building strategies and skills that go beyond 'average Joe's managed funds and term deposits'. I would venture to say we also have a risk tolerance far beyond average Joe! So each to their own and do what works for you and fits within your risk tolerance. But at some point I contend we all need diversification even if it is only in a narrow sense of the meaning.
All wealth building methods have their pros and cons. Some are more labour intensive, some are more intellectual, some require specialised knowledge, some are completely passive once established. It is all a matter of balance between risk, return, labour and skills. More risk, labour and skills gives rise to an expectation of more return and vice versa. The long term end game is a well constructed, stable and predictable passive income and plenty of free time for life pursuits and passions. Again I contend that this requires some form of diversification to achieve even if only 'intra asset class'. It may take a labour intensive strategy to get the end game but my view is that at some stage we ALL need to diversify our interests partly for risk management and partly to shift in to assets that don't require intensive labour or management and pay a stable income return while not being overexposed to a singular asset class or asset for that matter.
Disclosure and Disclaimer
I am a qualified financial planner. All information posted is general in nature and should not be taken as personal advice.
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