Diversification: The Strategy of Numbers
Diversification is important to investors as it is a way of balancing risks and rewards. Allocating capital into a variety of assets lowers risk exposure. Rather than concentrating money into a single company, industry or asset class, investors can diversify their investments across a range of different companies, industries, and asset classes.1
Risk minimisation and increasing opportunities for success
The risk of not following a diversification strategy is high; instead of placing all your hopes on a sole investment, dividing your funds across all assets is the smarter strategy. To put it more simply, don’t put all your eggs into one basket as an investor.
Respected global financial expert Ray Dalio has this advice for investors to reduce risks without reducing expected returns. “Diversify between currencies, asset classes, and countries as the best way to reduce risk without reducing opportunity.” 2 According to my own research, this advice should ideally include partners as well, I describe this in example three with reference to a single company.
He goes on further to explain this strategy in detail and calls this the holy grail of investing. He advises that investors, “Need 15 uncorrelated bets, an array of attractive assets that don’t move in tandem, reduce risk by 80% and risk/return ratio increases by a factor of 5!” 3
No idea what that means? You’re not alone.
Arguably diversification is such a simple term and yet it is such a complex thing to implement in your financial planning,4 let’s unpack what Dalio means by analysing a few real-life investment examples I’ve come across.
Implementing diversification in financial planning
A homeowner is advised by his financial advisor to pay off his house first before he starts investing. He lives in an emerging market like South Africa, so he continues to pay down his mortgage on his home. He is entirely exposed to South Africa’s weakening economy and its volatile currency, which depreciates statistically by 6% a year against the US Dollar.
All his wealth is tied up in one: asset, country, currency, and partner. He isn’t making any money while he sleeps, and this is a classic situation where an investor has ‘all their eggs in one basket.’ 5
An investor flies to London and buys an apartment to try diversifying their investment portfolio, it is an affordable apartment for London, and it costs £500,000. They apply for and receive a 60% mortgage (loan-to-value) from the bank, and with the deposit and costs, they still need £225,000 in cash (about $300,000 USD). It is a one-bedroom apartment, and the investor needs to arrange for a rental management partner to find a long-term tenant to earn an income on the property.
This investor also has most of their eggs in one basket, the investment is in a single country, currency, asset, and one partner. If the tenant stops paying, they lose all this income. Factor in challenges such as Brexit or any other economic setbacks, and the asset is fully exposed. If the rental management agent isn’t good, this is a problem as the investor relies solely on this partner to obtain a tenant, get an income and achieve success.
In 2014, I focused on a specific genre and asset class in America. Initially, we had a number of different partners, but then in 2018, all these properties and partnerships were consolidated into a single company. From 2014, these assets and individual partners were well-performing assets, producing a high income. Some investors liked the performance of these investments and invested all their capital. Due to COVID-19 and other factors, this consolidated partner (now one company) has vacancies on many of their assets and isn’t paying out the expected income.
The investors placed all their eggs in one basket. Granted, investors have multiple assets; however, this is an investment in a single country, currency, and with one partner. If the partner experiences problems, investors are fully exposed to the risks. It’s akin to one partner carrying all the investors’ eggs in one basket.
Hard-won investment lessons in diversification
I learnt this the hard way, and I’ve been investing internationally since 1999 and helping members in 170 countries invest over $1,18 billion (USD). I have learnt from the wealthiest investors and watched what they do. Here’s my perspective on Dalio’s advice about diversification.
Imagine if the investors in either scenario were to do something like this. Take $100,000 (USD) and invest $10,000 (USD) in 10 alternative asset investment opportunities. These are diversified across countries, currencies, assets, and partners.
If two of the assets don’t perform well, the other 80% is still working. Therefore, the risk is reduced by 80%, there is no correlation between these assets, and they don’t move in tandem. The income and capital growth are diversified across 10 opportunities, and the risk or return ratio is increased by a factor of five. (This means you are five times better off).
The power of FinTech and Wealth Migrate
Through advances in tech and with digital platforms such as Wealth Migrate, you can create wealth simply and securely, starting from $100 (USD). Wealth Migrate’s mission is to make quality alternative assets accessible to anyone, anywhere, from any amount.
Over the last 12 months, my wealth creation journey has led me to:
- Invest in 10 different assets
- Across 4 continents
- In 5 currencies
- In 9 different asset classes
- With 10 different partners
Wealth Migrate has changed how I can invest. Not only is it digitally integrated with Lemon Way, the largest digital wallet provider in Europe, but this FinTech platform also grants me control over my asset portfolio by efficiently managing these investments.
All distributions and dividends are paid straight into my digital wallet, and I can then decide to re-invest in more assets ranging in variety and diversity. One of my highlights is that despite the challenges of COVID-19, I still received a weighted internal rate of return of 14% in the last 12 months.
Learn from the wealthiest investors about wealth creation and protection
Ray Dalio manages $160 billion (USD), and Bridgewater Associates is the largest hedge fund globally.6 By following his investment advice on diversification, investors can achieve success with their portfolios. Even if the investment amount ranges from $1,000 (USD) and $100 (USD) is invested into 10 deals, or if it’s $10 million (USD), Wealth Migrate will allow investors to emulate this method of wealth creation.
The world has changed and with that, we must change our conditional way of thinking. It’s no longer about buying one apartment or trusting one partner, it is about diversifying and investing in the best partners and the best global opportunities. During the last year, an estimated “25% of all real estate private equity capital is now raised using online crowdfunding in America” 7. This trend is rapidly advancing around the world and now you can take advantage of it.
This is my ten cents on diversification, based on what I see happening in the market. I invite you to copy and invest like the most successful investors in the world.
1 Robbins, T. (February 2017). ‘Unshakeable: your financial freedom playbook creating peace of mind in a world of volatility. Retrieved from Unshakeable.
2 Graffeo, E. (November 2020). ‘Investing legend Ray Dalio tells investors to not own bonds or cash’. Retrieved from Markets Insider.
3 Robbins, T. (February 2017). ‘Unshakeable: your financial freedom playbook creating peace of mind in a world of volatility. Retrieved from Unshakeable.
4 Comstock, C. (September 2011). ‘Here’s the most brilliant thing Ray Dalio said at his interview last week’. Retrieved from Business Insider.
5 Gravier, E. (November 2021). ‘Every financial planner will tell you to diversify your portfolio — here’s what that means’. Retrieved from CNBC.
6 Copeland, R., and Levy, R. (January 2020). ‘Ray Dalio is still driving his $160 billion hedge-fund machine’. Retrieved from The Wall Street Journal.
7 Gower, A. (2021). ‘Real estate crowdfunding unleashed’. Retrieved from GowerCrowd.