Thursday, October 22, 2015

Why Diversification Might Help You with Your Greatest Money Issue…Fear

Scared of money?  Impossible you might say.  People love money, right?  So how could they be scared of it?  But I hear time and again how people like to carry credit cards rather than cash so they don’t have to worry about it being lost or stolen.  I hear how people worry about identity theft and their financial information being stolen.  I read about the fear of inflation eating away at savings or fear of a stock market collapse.  There’s even a song by Notorious B.I.G entitled, “Mo Money, Mo Problems.”  So obviously, money fear is an issue for some people. 

So how could diversification help with combating such fears?

A nice combination of real and imaginary
Even though shares of stock might technically be “pieces of a company” this doesn’t necessarily translate to the shareholder directly as actually owning something physical.  For example 1000 shares of a car company doesn’t necessarily mean you own an actual part of an assembly line, six vehicle engines, or a vehicle itself.  Therefore, I consider things like stocks, bonds, ETFs, futures contracts, and non-physical commodities as more imaginary investments based purely on the faith that someone will compensate you monetarily for your shares rather than provide actual physical goods or services for those shares.

This might be best illustrated with commodities.  Owning futures contracts or ounces of silver or gold through paper contracts doesn’t necessarily mean that someone is actually setting these precious metals aside in some vault somewhere.  Meanwhile, if I go out and buy actual coins or bars and put them in a safe deposit box, I own actual precious metals.

Therefore, diversifying my investments between real (physical), and imaginary (promised) assets can make me feel better about my money and hedge against finding out down the road that the metals in my account were never there to begin with.

Winning a little a lot
Don’t you hate when the stock market is on the downturn and day after day you see your account balance fall?  But what if at the same time you owned gold or real estate and these values were increasing?  Or what if while gold and the housing market were trending down, the stock market was going up?  Or what if your US stock market holdings were down while your Asian or European holdings were up?

There are a variety of scenarios to play with, but my point is that when you’re well-diversified, you may see wins in different areas which could balance out or even exceed your losses.  While they might not be as big of wins, they are wins nonetheless, and as I mentioned previously, they may help take some of the sting out of losses in other areas.  Not only this though, they may help keep up your motivation to continue saving and investing, even when longer investment downturns take place.




Disclaimer:

The author is not a licensed financial professional.  This article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

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