Diversification

We had a conversation with a friend the other day, about how to diversify one's portfolio properly. Despite how we may sound on occasion, we don't believe that having all one's wealth in anything -- even precious metals -- is a good thing. We're bullish, but we're not that bullish; when we start hearing 'sure things,' we get nervous... and we don't want to sound like the pushers for Bernard Madoff. The Uncle Bernie Affair is a good example of, shall we say, over-bullishness.

However, there is more to diversification than simply investing in multiple sectors of an economy. The likelihood of any one scammer, like Mr. Madoff, making off with one's life savings is decreased if one keeps any one investment to an acceptable percentage of one's total assets. We remember the stories of the people who gave everything to Mr. Madoff, only to lose everything... and we can't really feel sympathy for them. Greed got the better of them, and lo, the price of such greed was revealed.

We are often worried that, despite our best efforts, our investments may be in the loving arms of someone similar to Mr. Madoff. In the era of Peak Scam, one cannot be too careful. So, we are looking at more than just diversification within one economy: we are looking at multinational diversification, albeit on a small scale.

Why, you ask? Well, having all one's money is U.S. Dollars, or euros, or pound sterling, or Japanese yen, is effectively the same as giving all one's money to Uncle Bernie. It's betting the farm on that particular nation's ability to hold together and defend its national currency and economy. We are not at all confident enough in any one nation to have all our assets valued in its currency... and subject to its political caprices.

It's a question of scale, to be sure; one needn't have a ranch in Argentina, a fishery in Iceland, and a factory in Russia. However, we feel it is a prudent idea to at least have some assets outside of one's nation of legal residence. International diversification will be increasingly important in the years ahead, and, as we mentioned, it can be done on a small scale, even for the average individual.

Minimising the Risk of Personal Financial Catastrophe

We were having a conversation with a friend recently about the steps one can take to avoid becoming destitute in one's old age. It occurred to us that these same steps apply to everyone at all ages and are generally good advice.

#1 Keep your income sources diversified. No matter how good it seems to be, no basket should ever hold all your eggs. Consider the people who put their entire life savings with Madoff. This applies to jobs as well. Don't count on your career choice necessarily being there for you. If your full-time job leaves you no time for developing other income sources, at least have a back up plan.

#2 Live within your means. Aim to live on less than 75% of your income. This may seem daunting, but it is always do-able. The less you save, the more at risk you are.

#3 Live in a small, paid-for house, in an OK neighbourhood. If the neighbourhood deteriorates, move. If the neighborhood gentrifies, move (and reinvest the profit) - though this isn't too likely to happen for a while. If you can't afford to move, you have violated rules 1 & 2.

Some years ago, we were living in Duluth, Minnesota when the city went on a demolition spree. They started tearing down perfectly good houses. We were very perplexed until we discovered they were enforcing a minimum square footage zoning ordinance throughout the city - and there was no grandfathering! Long-term residents were being forced out of their homes for no other reason than the houses were 'too small'! In light of current developments, this policy was completely insane. People need to have the option of living in small houses, when they cannot afford big ones. If cities only allow big houses to be built, as people become poorer, fewer and fewer people will be able to live in their own private houses.

#4 Be physically active. It keeps you healthier and stronger. It sharpens your mind and increases your stamina for work.

#5 Learn new skills. It keeps your mind sharp.

#6 Maintain a social network. If you lack social skills, develop them.

#7 Don't opt for elective medical procedures. They are budget busters, and often do more harm than good. Learn self-care, and low cost management of conditions that require attention.