Diversity Trinity
The Diversity Trinity
Today we are talking about a very important aspect of financial investing – diversification. Diversification means using your financial resources in different areas. The Diversity Trinity explains how diversification can be achieved in financial investing.
The Diversity Trinity is a simple yet powerful concept. The Diversity Trinity is essentially a triangle. At its three vertices we have, The Financial Diversity — In, Within and Without.
You have your financial resources and the first thing you do is decide to invest in stocks, so you are “in” stocks according to The Diversity Trinity. Now, is it enough to just be invested in stocks? No, you need to be “within” stocks; you need to be diversified within stocks. Own stocks of different companies for example: large, mid, and small cap companies; in different sectors for example: retail, manufacturing, pharmaceuticals, etc.; and in different countries. It is important that all your stocks are not affected by the same economic factors. So now you are truly diversified within stocks. Is that enough? No, you need to invest “out” of stocks as well. This means investing in bonds, annuities, and alternative investments. Now your financial basket is truly diversified according to the Diversity Trinity and you have tried to insulate yourself from economic changes affecting a specific sector, industry, or country. What you have achieved for yourself is diversification and minimized of risk.
Another example would be if you want to invest in real estate stocks. You can buy a single real estate stock to be “in” real estate as per the Diversity Trinity. But buying a single real estate property is not as smart as buying a real estate investment trust which invests in hundreds of income producing properties, this is being “within” real estate. This is not adequate though; you need to be in other sectors “out” of real estate to ensure that all your investments are not hit when the real estate market is affected. Therefore, the Diversity Trinity and diversification are simple yet complex principles.
Most people know that they must achieve diversification in their investments. And some are under the illusion that they are well diversified. In reality, most analysis done reveals that most people put 75% of their money in large capital stocks. So study your investments carefully, use the Diversity Trinity, and do your own analysis. Measure your diversification and use the Diversity Trinity as your guide to Diversification.
Tags: diversify, in, john pollock, out, within
