Sign up

Financial Education Blog

Blog Author
Blog Month
“Diversification in Investing is for Idiots”

“Diversification in Investing is for Idiots”

It’s been a bloody week on Wall Street. In a wild, roller-coaster-ride of swings on the stock market, the Dow closed down 175 points for the week.

Here’s a summary of the Dow’s activity for the week:

  • Monday - Down 634.76 points
  • Tuesday - Up 429.92 points
  • Wednesday - Down 519.83 points
  • Thursday - Up 423.37 points
  • Friday - Up 125.71 points

The last time the stock market saw such wild swings was 2008, which eventually led to the Dow going down to 6,547.05 points in March of 2009 - a 53.78 percent tumble from it’s 2007 high.

Is this week’s market activity the sign of another dramatic fall coming in the stock markets?

We’ll have to wait and see.

“Diversification is for Idiots”

One thing I do know is that “diversification” is a bad idea, especially now.

Warren Buffett, one of the greatest investors alive, says, “Diversification is a protection against ignorance.”

And just this week, Dallas Maverick’s owner, Mark Cuban, said, “Diversification is for idiots.”

Why would these rich and successful entrepreneurs say such things? Because it’s true.

The reality is that what the general public thinks of when they hear diversification isn’t really diversification at all. Instead, it’s putting all your eggs in different parts of the paper-asset basket.

One of the Sacred Cows of Money is, “Invest for the long term in a diversified portfolio.” This sacred cow needs to be shot. It’s bad investing, and it hurts millions of people - especially when the markets crash.

Change in the Rules of Retirement

This sacred cow arose after the rules changed in 1974 with the passage of the Employee Retirement Income Security Act (ERISA), which opened the door for the 401(k) retirement plan.

Prior to 1974, employees could expect to get a paycheck for life from their employer after they retired, thanks to their defined benefit (DB) retirement plan. After 1974, employers started moving employees from DB plans to defined contribution (DC) plans, which forced millions of people to become investors without the necessary education.

This led to the rise of financial planners. Today, it takes 30 days to become a financial planner and a year-and-a-half to become a massage therapist, so that should tell you something.

Financial planners essentially are the henchmen of banks and mutual funds to sell you their products, take your money, charge you fees, and use your money to get richer.

When they talk about being diversified, what they really mean is spreading your money around one asset class – paper assets. And when the paper asset markets crash, like they did this week, you lose.

Four Asset Classes

True diversification is investing in all four asset classes, which are:

  • Business: Owning a business that creates cash flow.
  • Real estate: Having investment properties that create cash flow.
  • Paper assets: Trading paper assets with technical investments.
  • Commodities: Hedging against markets with commodities such as gold, silver, oil, and more.

As an investor, you should be in all four asset classes, and you should be specializing in one or two. Most people are only invested in paper assets, and they have no knowledge about what they’re investing in, so they listen to financial planners and hold a basket of paper assets for the long term, hoping the market goes up.

And that’s a good idea – if, like Warren Buffett says, you’re ignorant. Or, if like Mark Cuban says, you’re an idiot. His words, not mine.

If you want to be rich, however, it’s a bad idea.

The Truth About Money

The best way to grow rich is to increase your knowledge about money and how it works - to discover the truth about money. The mission of the Rich Dad Company is to provide financial education that helps take you from financial ignorance to financial enlightenment.

And we try to do this for free as often as possible.

“Invest for the long term in a diversified portfolio” is just one of 8 sacred cows of money that I discuss with my advisors in my new e-book, Shooting the Sacred Cows of Money. We’re giving this book away for free to Rich Dad community members.

Registration for the Rich Dad community is free as well. As a Rich Dad community member, you’ll get access to great resources and a like-minded community of individuals to help you grow your financial knowledge.

There’s no catch here. I just want to help you gain a better understanding of money so that you can prosper while others perish financially.

I encourage you to register today for the Rich Dad community and get your free copy of Shooting the Sacred Cows of Money.

Leave A Comment jump to leave a comment
8/19/2011 1:42:30 PM
I registered, how do I get that free copy of the "Shooting the Sacred Cows of Money"?
8/23/2011 11:28:03 AM
Hi richdad,I'm an University student from China.I‘m your fan when first reading the Richdad before 6 years ago. Sorry my English is not very well.Can you tell me something about Gold?It's have been the high price now? I’m reading the Rich Dad's Adivisors:Guide to Investing In Gold and Silver now.But It is writen by2008. It's very good idea.In 2011,it is still an opportunity to us?not too late? Thank you very much! Sorry taken a wrong reply only
Wednesday, August 24, 2011
You don't really make sense, surely you "paper assets" are shares which can be businesses that generate cash flow, for example exxon, you own the stock it pays you a yield therefore you own the business, this can encompass all your asset classes. Also you say paper assets go down, well if you mark to market your investments you will get up and down days on your non paper assets. You clearly don't understand what you are talking about.
Thursday, August 25, 2011
I disagree with you. Although you own 'shares' in Exxon - you really do not have any control on how the company is run & what & when information is released. This is not the same as a business.
Tuesday, September 13, 2011
Hi Robert, Warren Buffett also said: "Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long- term owner of American industry. That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know- nothing investor can actually out-perform most investment professionals. Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb. On the other hand, if you are a know-something investor, able to understand business economics and to find five to ten sensibly- priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices - the businesses he understands best and that present the least risk, along with the greatest profit potential. In the words of the prophet Mae West: "Too much of a good thing can be wonderful." Source: Hence: It depends on what you want from your financial life! Apart from that, it's obvious that you can't get rich if you buy low-cost index funds according to a proper long term asset allocation but it's sure you will not die poor because 7/8% compounded in 35 years, is not so bad!! "Compounded interests are a miracle of the universe" by Albert Einstein In conclusion, Robert you are a great saleman and coach but sometimes you should report all the things and not only a part!! Ciao, greetings from Italy! Fab
8/16/2011 2:54:20 PM
Hi Robert, I leave at one of the emerging markets countries. As you point out that dollar will loose its value because FED keeps printing- do you think the $ will loose also against emerging market currencies like Brazilian real, Polish zloty or Indian INR? I am asking because usually if the is a global crisis-$ appreciates strongly against emerging marktes currencies. In this case- it is logical rather to buy $ -rather than run out from it. Can you please comment on that?
Wednesday, August 17, 2011
Hi. You should read Richard Duncan's Corruption of Capitalism. He states that trading partners with the United States that have trade surpluses also "print" more of their currency to keep the value of their currency down and keep their exports competitive.
Tuesday, August 23, 2011
Hi richdad,I'm an University student from China.I‘m your fan when first reading the Richdad before 6 years ago. Sorry my English is not very well.Can you tell me something about Gold?It's have been the high price now? I’m reading the Rich Dad's Adivisors:Guide to Investing In Gold and Silver now.But It is writen by2008. It's very good idea.In 2011,it is still an opportunity to us?not too late? Thank you very much!
8/16/2011 5:11:48 PM
Hi,Robert I do heavy investing in mobile homes in mobile home parks. They are very inexpensive and I buy them for cash and rent to own them...nice cashflow. Good idea for a new book.
8/18/2011 5:17:19 AM
@ sebastian, the dollar is doom already.check currency piars against the dollar such as USDJPY, USDCHF and Gold priced in dollar, you will sense that this assets classes are in uncharted territory, then you will know that we're in dollar crisis. If real,zloty and indian INR were pegged to dollar meaning not being in free float regime, these currencies will suffer if dollar suffers but if the currencies were not pegged to dollar,their authorities allowing floating system(prices being determine by invisible hand of demand&supply) the currencies will not suffer dollar loss but appreciate rather.
Monday, August 22, 2011
Thanks for the comment. I am just wondering- if Robert is predicting massive sell off on Wall Street in 2014 (due to retirement population's demend) what impact is it going to have on emerging markets? I think- US sell off will trigger EM sellof-even more intensive. If so, then EM currenices will masively decline vs. US dollar (also against CHF and JPY of course). That means-if we assume 2014 will happen- I should start buying US dollar rigt now and selling my local currency. Am I right?
Play CASHFLOW Classic

Latest Rich Dad Blog Posts