Diversify and Rebalance More Than Just Your Investments

with No Comments

Diversification is a staple of financial advice. Don’t put all your eggs in one basket because if you drop the basket you won’t have any eggs. In the same way, don’t put all your assets in one company stock because if that company doesn’t perform well you might have jeopardized your financial needs.

Diversification is responsible. It is the difference between being willing to break every bone in your body as an Olympic skier and safely skiing with friends. As David Marotta writes:

Even if you have the risk profile of an Olympic skier that doesn’t mean you need to have a do or die investment portfolio. When it comes to money, every investor should avoid the three cardinal investment sins: fear, greed, and pride. Fear keeps you off the slopes, greed makes you ski faster than is safe, and pride makes you risk everything in order to get a place on the podium.

In month to month snapshots, diversification dampens both the highs and the lows. You always have an investment to complain about and an investment that is your darling. But the goal isn’t to invest only in what goes up. The goal is to support your financial needs, which is why your portfolio needs diversification.

You have other needs in life. You have needs for provisions, safety, health, belonging, self-esteem, and more. To support these needs you also cultivate a portfolio. The problem is most of our portfolios to meet these other needs are not very diversified.

Take your support network of friends and your need for social belonging. Co-workers are awesome, but if there is drama, tension, or turnover at the office, your need for social belonging will suffer until that market recovers. Diversifying your friend groups may dampen your sense of belonging, but it protects you from loosing your whole support network overnight.

Rebalancing is another staple of financial advice. It is the contrarian move of taking assets from the darling and investing them in the disappointment. We rebalance because sticking with an investment plan by regularly rebalancing back to your targets produces a better return called the rebalancing bonus.

This is true with your other portfolios as well. With more than one friend, your portfolio can better endure the ups and downs, and rebalancing between friends can produce a rebalancing bonus.

Imagine your best friend is having a lousy year and thus being unsupportive. If all you have is that one best friend, then all your social wealth would be tied up in that one friend’s volatility and your needs won’t get met. With a second friend (diversification), your needs can still get met. For an even better return, you can use the emotional wealth this supportive friend gives you to reinvest your energy to help the friend in need. When done lovingly, this act of rebalancing helps boost everyone’s portfolios.

Rebalancing and diversification can be applied very generally to our diets, exercise, and more.

We need a diversified portfolio of interests for our sense of self-worth. If all your self-worth is invested in your work, you can lose your self-esteem in an instant. You need multiple facets of your identity to be important to your self-worth for your protection.

Then, when you are a disappointment in one area, your self-esteem portfolio as a whole can still remain solvent on the success of the other areas. You can even rebalance, drawing on your sense of success as a parent, for example, to fuel you to correct the problems in your work.

In a 2011 interview , Tim Ferriss talked about this concept of identity diversification, saying:

One of the recommendations that I make to many of the startup founders I advise is to have at least three or four areas of interest outside the business. Don’t become a Dow Joneser, someone whose mood and self-worth goes up or down dependent on the Dow Jones, which you have no control over.

If your entire ego and identity is vested in your startup, where there are certainly factors outside of your control, you can get into a depressive funk that affects your ability to function. So, you should also, let’s say, join a rock climbing gym. Try to improve your time in the mile. Something like that. I recommend at least one physical activity. Then even if everything goes south — you have some horrible divorce agreement with your co-founder — if you had a good week and set a personal record in the gym or on the track or wherever, that can still be a good week.

These ideas can be widely generalized. Mark Manson in a 2012 blog post writes about emotions:

As soon as you try to eliminate a thought or emotion, you make it stronger.

As the Buddhist saying goes: “What you resist will persist.”

Or as Tony Robbins says: “You feel what you focus.” The more you focus on an emotion, the more powerful it becomes. Thus, negative emotions are like quicksand, the more you struggle to get out of them, the further into them you sink.

The trick is to accept them and then let go. This is a skill and it is a process, but it cannot be practiced until you recognize that there are two minds and you only control one of them.

In other words, be a well-rounded person and diversify your emotional portfolio. Don’t live on only the manic happy-sad axis and don’t throw all your emotional assets into today’s trending feeling. Rebalance. Focus on the goal of emotional stability and let the highs of Happy dampen the lows of Jealousy.

Diversify. Don’t chase returns or try to time the markets. Be here now. Stick to your investment plan. Rebalance. Be a contarian.

Investments, like life, are volatile, risky, and on average rewarding. Diversification and rebalancing help to protect yourself from the volatility.

Photo by Amy Treasure on Unsplash

Follow Megan Russell:

Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.