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Diversify Among The Five Asset Classes

Diversify Among The Five Asset Classes

We must invest among the five asset classes that exist today.

Master Investor
May 01, 2024

Summary:

Everyone ought to diversify across a variety of asset classes.
We shouldn't depend on a financial advisor to "diversify" our assets.
Financial acumen is necessary for true diversification.

The wealthy create these scams to keep majority of people in their place. These are the "rules" that others are expected to go by in order to remain an employee and prevent them from becoming wealthy meanwhile we the wealthy get wealthier.

The fact that some of these schemes, like conserving money and working harder, formerly held water is the reason why so many people fall for them. There used to be a prize if we followed them, but not longer.

The believe in diversifying in one asset class like majority do prevent them from really using their money to make a difference, as we've seen in earlier scams like pay off debt, live below our means, and save money. Those ideas are scams because the person poor while the person thinks they are becoming wealthy.

They prevent us from making further money with our money. That is to say, they maintain our poverty.

We will examine the wrong financial advice sales people give to others by saying: “Build a diversified investment portfolio (only paper assets they mean) for the long term”.

The fallacy of portfolio diversification

Diversification on only one asset class is only for naive people.

One of the greatest investors of all time, Warren Buffett, states that "diversification is a protection against ignorance."

Why would these prosperous and accomplished businesspeople say things like this? since it is accurate.

"In the long run we are all dead," famous British economist John Maynard Keynes famously remarked. This was his way of saying that it was silly to think the economy would always balance out.

This is the reason the Federal Reserve constantly modifies financial policy, for better or worse. They contend that for the economy to grow, government intervention is necessary.

Interestingly, the financial industry complex does not view your finances in this manner. Rather, they advocate for "long-term investments in a diversified portfolio of stocks, bonds, and mutual funds." "Let me manage our money by buying paper assets that we never sell in the hopes that the markets always go up for a fee, of course," is what they mean when they say this.

This is a way of saying that it was silly to think the economy would always balance out.

This misconception about a diversified investing portfolio goes something like this:

Uneducated Investors will say that they have enough money for retirement if we spread our investments across equities, bonds, and mutual funds and do nothing except watch them grow over time. This is a result of the unwavering conviction that markets increase magically over time.

Everything is assured, with the exception of death and taxes, according to the history of the financial markets, which includes both the Great Depression and the more recent Great Recession. And it covers every long-term investment, including stocks, bonds, and mutual funds, that our financial advisor will advise us to purchase.

Many of those who had been banking on these markets' steady, long-term growth came to the terrible reality that, if we are not ready to move, short-term market effects can completely destroy our financial situation. Many of those who had planned to retire during the Great Recession found themselves bankrupt after years of following the advice to accumulate a long-term, diversified investment portfolio.

It's important to remember that until around 40 years ago, when individuals were compelled to manage their own retirement savings through programs like the 401(k), financial planners were nonexistent.

The banks founded the financial planning sector in order to profit from those who lack financial literacy.

The training required to become a financial planner only lasts thirty days. In the meanwhile, becoming a massage therapist requires more than a year of education. Ultimately, the illusion of the diversified investment portfolio is nothing more than a persuasive sales pitch that the uneducated about finance have fallen head over heels for. It has created a $75 trillion industry in the process.

The appearance of actual portfolio diversification

Almost all financial advisors will tell us that diversification is essential to financial security. They intend to invest in mutual funds, stocks, and bonds by doing this. Sadly, this isn't really diversification.

Instead, it is focused on diversification within the single asset class of paper assets, which is where banks derive the majority of their profits from fees. The other asset groups, which include business, real estate, and commodities, are essentially disregarded.

The same shaky economy and investment strategy underpin everything we own when it's all still on paper. When the stock market declines, it does so globally and not just locally. If everything collapses and the market collapses, it won't matter if we invest in McDonald's and Microsoft. Investing widely in several mutual funds distributes the risk even farther, but when things go wrong, the hit will be the same and the danger remains the same.

Investing across a variety of asset types, as opposed to a variety of equities, is true diversification. This is applicable to all asset classes. Our portfolio may appear diversified if we have investments in houses, condominiums, and apartments, but they are all still real estate.

Rather, you require actual diversity, which includes holdings in real estate, commodities like gold and silver, businesses, and yes, even some paper assets.

Five Types of Asset Classes

Investing in each of the four asset groups represents true diversification. These are:

Business: Being the owner of a cash-flowing enterprise.
Real estate: Possessing cash-flowing investment properties.
Paper assets: Exchanging technological investments for paper assets.
Commodities: Using assets like gold, silver, oil, and other commodities as a hedge against market fluctuations.
Crypto: Using digital currency such as Bitcoin as an alternate payment mechanism and investment vehicle.

All five asset classes should be included in our portfolio as an investor, and we should focus on one or two of them. Most people are only invested in paper assets, and they have no knowledge about what they’re investing in, so they listen to financial planners and hold a basket of paper assets for the long term, hoping the market goes up.

And if people are as ignorant as Warren Buffett claims, then that's a great idea. Or if people a fool, as Mark Cuban puts it. Not our words, but theirs.

It's not a good idea, though, if our goal is wealth.

The first step toward real portfolio diversification is financial education

The true problem with this is that we are giving someone else power over our money when we purchase any paper assets at all. When a CEO makes a poor choice, the stock plummets and we are forced to bear the consequences. Selling paper assets is the only way we can maintain control over them. We are merely crossing our fingers and playing the waiting game when we hold onto them.

Furthermore, if we transfer those paper assets into a 401(k), you lose even more control over them, they get locked in, and we incur penalties if we withdraw the money or take out a loan against them.

Financial education provides financial intelligence, which is necessary for true diversification. Continue employing our financial planner and investing just in paper assets if we don't feel the need to become more financially literate. After all, those investments are designed to be easily managed by even a monkey.

However, if our goal is wealth, then we should disregard, which suggests creating a varied investment portfolio over time. Instead, we should become more knowledgeable about finance and start pursuing actual diversification among the five asset classes that are available to all of us.