“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.

Original publish date: August 16, 2011