Owning multiple stocks or ETFs does not create a genuinely diversified portfolio. True diversification involves owning assets that react differently to various economic conditions like inflation, recession, and liquidity shifts. This means spreading capital across productive equities, real assets, commodities, hard money like gold, and one's own earning power.
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In an economy where currency is being systematically devalued through money printing, holding cash is a losing strategy. The only way to preserve wealth is to own a diverse basket of 12-15 uncorrelated assets (e.g. stocks, commodities, real estate) that are subject to different economic pressures.
Many problems have a single "correct" answer (convergent). Investing is different; it's a "divergent" problem where key questions require balancing opposing virtues: concentration vs. diversification, patience vs. urgency. Success lies not in finding a single rule, but in intuitively harmonizing these tensions.
In high-inflation environments, stocks and bonds tend to move in the same direction, nullifying the diversification benefit of the classic 60/40 portfolio. This forces investors to seek non-correlated returns in real assets like infrastructure, energy, and commodities.
The 60/40 portfolio is obsolete because bonds, laden with credit risk, no longer offer safety. A resilient modern portfolio requires a broader mix of uncorrelated assets: cash, gold, currencies, commodities like oil and food, and short-term government debt, while actively avoiding corporate credit.
Having lived through hyperinflation where money became a meaningless number, the real store of value is owning productive assets. A portfolio of quality businesses that provide real goods and services offers tangible protection that fiat currency cannot, as these businesses can adapt and reprice.
The key to long-term wealth isn't picking the single best investment, but building a portfolio that can survive a wide range of possible futures. Avoiding catastrophic losses is the most critical element for allowing wealth to compound over time, making risk management paramount.
The sign of a working diversification strategy is having something in your portfolio that you're unhappy with. Chasing winners by selling the laggard is a common mistake that leads to buying high and selling low. The discomfort of holding an underperformer is proof the strategy is functioning as intended, not that it's failing.
Gold is a low-returning asset, similar to cash. Its primary value in a portfolio is not appreciation but diversification. During periods of stagflation or debt crises when other assets like stocks and bonds perform poorly, gold tends to do very well, stabilizing the portfolio.
Unlike older Western wealth, recent Asian wealth is often highly concentrated in the business that created it. This creates significant correlation risk. A primary role for financial advisors in this market is to act as a trusted counterweight, pushing founder-clients to diversify into different sectors and currencies.
In an environment dominated by government debt and money printing, holding cash is not a neutral act of saving; it's direct exposure to inflation. As the government devalues the currency to manage its interest payments, the purchasing power of cash diminishes. The priority must shift from simply saving to owning productive or scarce assets as a defense.