If there was ever a massive topic to cover when it comes to investing, it would be diversification. There are so many elements, and opinions, on this because everyone is different - there's no set formula to be applied, sadly. This means that I'm able to talk about diversification, mention mistakes I've made, and discuss various scenarios but at the end of the day, you need to decide what's best for you based on everything going on in your life.
I felt that one of the best ways to tackle this was to walk you through what my journey was like when it comes to diversification.
When I started investing, it didn't take long for me to hear about, "diversification". I explored this and started to realise that there was a lot to it. Here are three things that jumped into my mind immediately:
I then realised that I could set things up locally and internationally, but then I'd need local property and international property, local stocks and international stocks, and so the combinations start to grow. Add a 4th diversification point (different brokerages) or a 5th (managed vs non-managed) into the mix and things start to become really complicated. And this isn't limited to 5, there are more! And, that's without even thinking about money available to invest - what do you do if you can't afford to invest into each, where do you start?!
At this point, I realised that without sufficient money, this would need to become a slow process. I'd need to start by diversifying with a few entities:
The property play wasn't a complex one in nature, it boiled down to finances so solving that simply meant coming up with the debt in order to purchase one. On the other hand, the ETFs and Brokers posed more complexity. Long story short, if I can remember correctly, I went with something along these lines:
Let's explore my thinking a bit:
Brokerage 1
I went with two brokerages because what would happen if one of them went bust? I went with a top 40 ETF because the fees were low (unmanaged) and a Balanced Unit Trust which was low risk but managed. This covered a number of angles for me.
Brokerage 2
Once again, reducing risk by not being with one brokerage only, I wanted some international exposure (it was still locally held, so not offshore) and commercial property seemed good so I got a fund with them that held companies like Growthpoint.
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This felt good to me, I was contributing a small amount each month and was decently diversified. As the years went by, I opened another brokerage, and diversified further and so my grand plan was coming into reality!
But...
I ran into problems:
I was managing all of this myself, perhaps it was the control freak inside of me and not trusting someone to manage my money as closely as I would, or it was me wanting to learn rather than receive a monthly report. Either way, I was doing it myself and now I had to start managing a lot of different brokerages, asset types, and so forth. The more I built, the more time this took and that lead to not actually being diversified! I found that various funds at various brokerages had big overlaps. For example, when I finally sat down, opened Google Sheets, and wrote down all the funds and their underlying assets, I found a lot of overlaps - My international exposure was heavily focused on North America, and in very similar companies, I wasn't nearly as diversified as I thought I was. Now I was in a position where I literally had to recreate everything with a new plan - this was a huge amount of work!!!
I drew on a whiteboard, isolated the overlaps, figured out where I was overweight, and then did all the research around other investments that would balance my portfolio. That lead me to realise that I might need another brokerage which would add another level of complexity to the structure of everything. I can literally remember this like it was the other day, I remember thinking to myself, "maybe I'm thinking into this too much, I must just leave it and continue" - That was so incredibly tempting because I knew the next step was going to be scary and complicated. I look back, and I'm so glad I didn't settle and that I obsessively sat at my computer figuring it all out. I ended up consolidating my portfolio, I closed funds, transferred money between brokers, paid capital gains tax, bought new funds that would allow me to consolidate two funds and so the list went on. It was really scary because this was my life's savings that I was pushing and pulling, as a fairly simple retail investor.
Going back, what would I have done differently?
I don't actually know, a lot of me is happy I went through the process because it taught me how to balance a portfolio, it taught me to explore deeper, it taught me how to research, and a bundle of other things I probably never would have figured out. Of course, I could have simply hired someone to do all of this for me but I would have lost out on the understanding and I can assure you when you understand, you know where to put your money and that's not always where an advisor would recommend - trust me on that. I've met many financial advisors in my life, some are linked to specific funds and therefore only tell you about them, some have too many clients and therefore don't have the time for you. I have, however, met a few financial advisors who are great and who don't sell but rather guide you - that's the sign of a great financial advisor, they don't push the products, they push the education based on what you've shared with them, they're as much a coach as they are an advisor. Anyway, wanted to put it out there that not all advisors are bad...
Sidenote: Over the space of 2 months, I met with 15 different financial advisors, I took notes during every meeting, crafted my questions and thoroughly investigated this. I took this on as a project, I wanted to truly understand how the industry was operating and what approaches were available. It was a fascinating experience, one that I learned a ton from.
Moving on...
Okay, seriously, what would you do differently?
If I were pushed to answer this, I think I'd probably structure my approach a bit more. This doesn't necessarily address the diversification side of things directly but it would have set me up better. I didn't not do this but I could have done it better:
I feel that those four components are essential before even thinking about investing. You need to get rid of debt before you invest, you need to understand what you do with your money, you need to have an emergency fund in place and you need to find ways to increase your income. Doing all of this is what sets you up to invest with confidence and decreased risk.
Now, once those components are in place and you're completely comfortable, it's time to look at investing and this is where the rabbit hole gets entered. I'm not a financial advisor, I cannot recommend products but I can give you an idea of what I would do:
What's really important to mention is that it's impossible to get this right from day one. If for no other reason things change over time. If you're not interested or capable of managing this yourself, that's absolutely fine and I'd suggest spending time looking for a financial advisor who listens to you, isn't linked to specific brokerages, and shows that they care - let them take you on the journey but do your best to have a meeting once or twice a year where you're updated. But, if you're someone who wants to manage your money, you see the value, and want the ability to control your destiny, please move slowly. You might have a plan in place and you have a child, you might have an emergency that needs attending to, you might have to support a family member, you might lose your job, you might get a better job, there are countless variables at play and things will change along the way so keep track of what you're doing. Don't make hasty decisions and, really importantly, have confidence in yourself. I cannot stress how important self-awareness and self-confidence are when it comes to doing this - I've learned so much about myself through this journey, it's been a wild ride but I wouldn't change it for the world! It's not even nearly over yet, let's go!
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