Financial professionals have mathematical formulas for investment portfolio diversification. However, we’ve all heard the simple phrase about investing, “Don’t put all of your eggs in one basket.” In my opinion, an options-trading expert (Don Kaufman) offers the most illustrative analogy, “You don’t want all of your soldiers in one spot when the bombs start dropping.” This is very important to know because, sooner or later, there is always an unexpected bomb strafe. You, alone, are the Field Commander responsible for the survival of your army on the battlefield.
Let’s examine how to apply this strategy to your potential investments:
- Are all of your retirement accounts invested in the same stock index or fund – or are they spread among several asset classes and types of investments?
- Are all of your rental properties in one city – or are you geographically diversified?
- Are you only positioned long the stock market – or do you have some short positions?
- Are all of your investments in your home country and currency – or do you have several?
- Are all of your options expiring at the same time – or do you have multiple expirations and multiple strike prices?
- Are all of your assets subject to lawsuit – or are some held in entities or investments that are protected from any creditor?
- Are all of your personal valuables hidden in one location – or do you have them in several locations and some secured offsite?
Whatever investment risk you can conceive, there is some way to minimize it with diversification or hedging. Take some time to look at all of the savings and investments that you have and consider, “If unexpected bombs start falling and one fell on this, would I be totally wiped out and have to start from scratch?” If so, then you need to make some immediate strategic and tactical investment moves.