Think through and use Smart Diversification to lower investment risks
Your personal diversification plan has to fit your situation and support your goals.
Every investor needs personal diversification. That personal diversification plan has to fit you. Your circumstances and goals are as unique as you. So a personal diversification plan is a very personal fix to fit your circumstances and goals.
When it comes to managing your investments, managing diversification, is an important part of the process. Diversification means not having all your eggs in one basket. The best diversification result keeps risks as low as possible, while holding the best opportunities for income and growth.
This is Part 2 in the White Top View Series, Smart Diversification. Links to all parts of the series is at the end of this post.
Using Smart Diversification is the best way to deal with all personal diversification issues. Be aware of your diversification choices and have a plan. A diversification plan, helps you meet financial security and retirement independence goals at the least risk.
Smart Diversification Is Personal – Every Investor Needs A Personal Diversification Fit and Fix
Building financial security and retirement independence is a very personal process. Just as your life is unique and different, you must craft a financial plan that fits you. It is different for you and each other individual investor. Your plan must consider, in financial matters, where you are and where you wish to go.
The plan and your personal diversification fit and fix is, and will always be, about you!
Portfolio Management And Diversification
Smart investors striving to become superior investors need to use Smart Diversification. Smart diversification helps you outperform the market while keeping risk under control. When either, using an excellent financial advisor or running their own portfolio, superior knowledge is common among all superior investors. Superior investors know and use Smart Diversification.
First: Look At Your Big Picture
We begin the Smart Diversification process by looking at our personal big picture. We must know where we are. Only then can we know which direction takes us to our goals. As always, start exactly where you are; consider your own financial situation and risks.
Take a personal big picture. Take a holistic view of your financial and economic life. For yourself, answer the basic question, “Financially, where am I?”
Your brother, sister, parent, child, friend, neighbor and even your partner, may have very different attitudes and points of view.
Your point of view is the one that matters to your plan. This important first step is about you and just about you. Understand where your money comes from. Think about what could put that at risk.
Diversification In The Investing Context
We are discussing using diversification in the context of investing. However, to do it well, you need to first consider the parts of the economy and all the financial risks you have in your life.
Someone living and working for the company in an industry built community has a very different financial exposure profile than a civil servant employed in a government town. A teacher with portable job skills and opportunities has different financial risks than a mortgage broker living in the same rural agriculture based community.
Their risk exposure differs so their diversification and financial plans also must differ. To develop your own plan, begin by considering your own big financial and economic picture. Identify your exposure to both risks and opportunities.
Personal Big Picture Considerations
Assets – list your assets (your stuff, like house, car, bank account, savings, investment account etc.) and liabilities (debts including credit card, loans, mortgage(s) and any other obligations you have). That tells you where you are beginning, in a financial sense.
Skills and Education – what employable skills and value do you offer? What makes you economically valuable? How transferable are you? This gives you the opportunity to consider how your package of skill, ability, knowledge and education could improve your employment or income.
Income – investors must make regular contributions to their future. Realistically review your income and what you can do to improve it. How much more can you give to your future?
Employment – how secure is your employment? Is there anything you can or want to do about improving it?
Employer – consider how secure your employer is in both the industry and in the market. Should you be looking for a better situation?
Industry – how secure is your industry? What competitive threats are there? What economic forces pose threats? Should you continue working in that industry?
Community – what is the economic base of your community? What economic forces could hurt that economic base? Is this where you want to live your life?
Family and Personal Relations – Ignore the relationship related financial risks at your grave future financial peril! Be realistic, be honest. If it needs fixing or changing, get to work on doing something about it.
Identify And Address The Issues
An honest and complete big picture review always uncovers problems and challenges. Acknowledge the issues to yourself. Then address them. Come up with a plan and get to work on making it happen. It is you future. Make it great!
If you design cars, sell dresses, program computers, truck gravel or do payroll for a sawmill, you know the organization must prosper to keep your paycheck coming. Think about the risks of the business and your industry. Know the risk exposure of your income. Know what parts of the economy affect you most.
Identify Community Economic Risks
When considering your community, learn what economic activity drives the place. Where does the money come from?
Every community, everywhere has an economic base and risks associated with that base. Identifying that base and the risks gives you useful knowledge. You can use that insight and the Smart Diversification process to lower your risk.
A fishing community or other resource town is very different from a transportation hub or a capital city. As a manufacturing center differs from a technology based region or a local economy dependent on an armed forces base differs from a seasonal holiday resort community.
Each community and the people living there, have differing financial risks. Identify the economic base of your community. Knowing that improves your awareness and your ability to make Smart Diversification choices.
Living in an oil town, working for the oil company, with your portfolio holding shares in the same company along with mutual funds that have 30% exposure to the oil patch and energy, is not diversified! That is high risk! To address that and every other situation, we continue in the next post in this series, the Smart Diversification process. Smart Diversification can help every investor meet the need for personal diversification.
In Part 3 of the White Top Investor, Smart Diversification Series, using the Smart Diversification process we discuss multiple types of investments.
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These discussions and information intend to help you better understand markets and investing. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice. For syndication of the site or blog, please contact info@WhiteTopInvestor.com.
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Links to the White Top View Series, Smart Diversification