The Importance of Diversification

I’m not a financial advisor or an accountant or attorney or anything, everything my perspective as an investor, but I have about 17 years of investing experience at this point when we’re recording it as a passive investor. I think that diversification is critical for passive investors specifically and probably critical even if you're active and the reason why I say that is because as a passive investor, I like to tell people that I trade control for diversification. That’s literally my mindset and so obviously, there’s a lot more to passive investing than just that, but if you think about that carefully, trading control for diversification. And essentially, when I’m passive, I have a very small piece of ownership and an LLC so for any voting items. You know, my vote is somewhat inconsequential, it obviously counts to an extent, but it’s a very small percentage and therefore, because I don’t have that control and it can’t really make decisions on a day to day basis, the diversifications absolutely key.

I think a lot of people will relate to the idea that not putting all your eggs in one basket and you know, you could think of Madoff, unfortunately those types of incidents and the thing it kills me about the Madoff story, aside from what he did was that some people put all their eggs in that one basket and lost everything and I’m guessing some people probably put 5%, 10%, whatever the percentage was and it probably hurt a lot, but it probably didn’t cause like a huge life blow up. How you approach diversification can literally make the difference between your financial life blowing up and just being a little bit of a problem and that’s not an exaggeration, it’s just the fact, diversification to me is just a very important topic, especially because as a past investor, I give up control.

Because I’ve been doing this full time for a long time now and I’ve been doing it full time for 12 years and in general, 17, I have the time to become what I call hyper diversified and so because I’m really low risk, I take a more hyper diversified approach which I think is a little extreme and for most people, doesn’t make sense both because they don’t have the time to become hyper diversified, they may not be dealing full time. And they may not even want to become hyper – people out there may not agree with the concept of being in so many opportunities, for me, it helps me to sleep really well at night. But you know, everyone’s going to have their own opinion as to what the right amount of diversification is for them, I can tell you that anecdotally, having this conversation with many fellow investors over the years.

I find it the most common level of diversification people typically seek if they really go out there and have a strategy towards diversification is possibly having somewhere between 2% and 5% of investable cash they’re planning on putting in this type of asset class and passive opportunities for opportunities. In other words, they’re spreading it across somewhere between you know, at 5%, its’ 20, 2% it’s a little bit higher, 2% is probably a bit extreme, it’s 50. Some people actually try to get it across 10. One of the biggest challenges in passive investing is that if you're being really careful and you’re really trying to do the right thing and be cautious with what you’re going into; it’s going to take a while to get proper diversification, I don’t mean days or months, I mean, years honestly. It’s a long, steady progression just like real estate typically is, but it really pays of in the long term as far as helping to reduce a lot of the risk.

Listen to full episode: https://lifebridgecapital.com/2019/10/ws354-the-importance-of-diversification-with-jeremy-roll/