This Popular Investment Advice Is Lethal

Financial Advice for Idiots Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] This Popular Investment Advice Is Lethal - “Diversification is really good advice for, well, financial idiots”… - Diversification doesn’t mean a diversified portfolio of stocks… - The difference between professional investors and amateur investors… Recommended Link [Is this the #1 threat to your money right now?]( [Read more here...]( It has nothing to do with the Green New Deal… packing the courts… or any kind of tax hike. And no, this threat has nothing to do with possible new legislation coming out of Washington. It’s actually far more concerning. And there’s not much time left to see what’s going on. [See This Warning Before It's Taken Offline]( Scottsdale, Arizona March 19, 2021 Editor’s note: How often have you been told that you need a diversified portfolio in case one market sector suffers? Today, “Rich Dad” Robert Kiyosaki shows you why that is poor advice and how professional investors practice true diversification. [Robert Kiyosaki] Dear Reader, When it comes to investing, the so-called experts preach to the masses with this advice: “Invest in a diversified portfolio of stocks, bonds, and mutual funds.” Why would they give this advice? It comes from good intentions, no doubt. The thinking behind the conventional advice on diversification is that if one part of your portfolio is hit by bad market conditions, then you’ll be able to hedge with other parts of your portfolio. It seems like good advice, doesn't it? What could possibly be wrong with spreading your risk among multiple different investment vehicles? In that context, diversification is the easiest way to help people who have no financial education manage their risk. Diversification is really good advice for, well, financial idiots. As we’ll see later in this article, it actually exposes them to even greater risk. And if you want to be really rich, you need to understand why diversification (at least how it’s popularly talked about in the financial world) is a bad idea. Why “Diversification” Is Bad Advice First things first, what most people consider as diversification isn't really diversification. Rather, it’s spreading your money across one asset class. Stocks, bonds, and mutual funds are all part of the same asset class — paper assets. A 401K that primarily invests in index funds is an investment vehicle that simply spreads money across one type of investment: stocks. That is not true diversification. That is actually specialization, and if you’re doing it blindly, you’re exposing yourself to great risk. In the event of a total collapse of the paper asset sector (i.e., a deep recession or depression), all your assets will sink. And if the timing is bad, it can be devastating — just ask the retirees who went through the Great Recession. The stock market came back, but it took years for investors to recover. Some never did. The market also recovered from COVID, but that was also because of massive intervention by the Fed. It’s inflated an enormous stock market bubble that isn’t sustainable. Recommended Link [Invest Better with Motley Fool Stock Advisor]( [Read more here...]( If you have been on the fence about joining Motley Fool Stock Advisor... today is the perfect day to take the plunge! Because we're taking up to 50% Off the list price of Motley Fool Stock Advisor today! And even better, thanks to our ironclad guarantee... you can take a full 30 days to "kick the tires" on Motley Fool Stock Advisor... and still get your entire membership fee back if you're not completely satisfied. [Click Here To Join Now]( Why Understanding True Diversification Is Important There are actually four asset classes: paper, real estate, commodities, and business. A truly diverse portfolio would have stakes in all or most of these. If you’re planning on using diversification as a hedging strategy, at least do it right, and make sure you’re diversified over all four asset classes, not just in paper assets. That, at least, will offer better protection from a total loss of your wealth, should one asset class crash. But at the end of the day, diversification is a zero-sum game. Gains in one class offset losses in another. Sure, it can be safe, but rarely does someone become rich by diversifying. As Warren Buffet says, “Wide diversification is only required when investors do not understand what they are doing.“ Buffett’s partner Charlie Munger says, "The whole secret of investment is to find places where it’s safe and wise to non-diversify. It’s just that simple. Diversification is for the know-nothing investor; it’s not for the professional." He adds, “a lot of people think if they have 100 stocks they're investing more professionally than they are if they have four or five. I regard this as insanity. Absolute insanity.” Diversification, Systemic Risk, and Non-Systemic Risk The reason diversification is a high-risk way to invest becomes clear when you consider systemic risk and non-systemic risk. A number of years ago, British Petroleum suffered a major oil spill. During that time, the company’s stock dropped by over 50%. However, this did not impact the market, and things carried on as if nothing happened in other stocks, the real estate market, etc. That is an example of non-systemic risk. If you had all your money in BP stock, you would have been hurting, losing half your wealth. But it would be isolated to that one company. The rest of the market investors would be fine. Amateur investors try to manage the type of risk that would come from focusing on one stock, in this case BP, by diversification across the stock market. The problem is that they then get exposed to systemic risk, which is much more dangerous. An example of systemic risk is the subprime mortgage meltdown. Brokers handed out mortgages like candy, approving zero down, stated income, no documentation loans. When millions of people who lied to get a house they couldn’t afford stopped paying those loans, the entire system was impacted. The S&P 500 index dropped by over 50%. When it comes to systemic risk, diversification won’t help you. And systemic risk is not a matter of if but of when. If you’re lucky, it hits when you still have time to recover. If not, well then, you’re screwed. It’s a big gamble when there are other strategies you can put into place that will not only protect you better but also make you far richer...if you have the financial education needed to execute on them. Recommended Link [Huge Monetary Shift Happening Now Under Biden]( [Read more here...]( Some of America’s biggest companies like American Airlines use an elite-controlled “world money”… instead of U.S. dollars. Also the U.S. House of Representative passed a new bill that could circulate this new currency ASAP. If this major monetary shift goes through, it could cut your retirement account, your savings, and property value immensely… And potentially erase your way of life in one fell swoop. It would be another failed fiat currency pushed by elites. [Full Details On How To Prepare Here]( Diversification vs. Unfair Advantage The most successful investors don't diversify. They have an unfair advantage over amateur investors because they focus, specialize, and insure their investments against risk through contracts. They get to know their investment category and how the business works better than anyone else. For example, when investing in real estate, some investors focus on raw land, and others focus on apartment buildings. While both are investing in real estate, they are doing so in different ways. They then use contracts, such as a rental contract, to guarantee income for twelve months and insurance to protect them from loss, lock in their unfair advantage, and make money even if the markets go up or down. The secret that the rich know is that you can insure any investment in any asset class, even in stocks. It takes financial intelligence to know how to do this. When Diversification Is Good Advice So, again, given what we’ve discussed here, why do financial advisors recommend diversification when the world's greatest investors choose not to diversify their portfolio? In short, they do it to protect the ignorant… or, again, what I call financial idiots. There are pro and amateur investors. Warren Buffett is a pro investor, while most people are amateurs. A pro investor, for instance, would know that an oil spill for BP would mean it would be time to hedge against loss. An amateur investor would make a move only after he had lost too much money. Pro investors focus. Amateur investors diversify. The real question is: Do you want to become a professional investor or remain an amateur? If you choose to remain an amateur, then, by all means, diversify. Diversification keeps you from “putting all your eggs into one basket,” so if one stock collapses, as BP did, only a portion of your portfolio will be affected. However, if you decide to become a pro investor, the price of entry is focused dedication, time, and study. Warren Buffett dedicated his life to becoming the best investor he could be. That is why he focuses and does not diversify. He does not need to protect himself from ignorance because he has invested time and money to understand what he is doing. Rather than practice diversification, I encourage you to practice focus. In the process, you will take control of your financial future in ways that amateurs simply cannot. Regards, Robert Kiyosaki for The Daily Reckoning P.S. Again, true diversification involves more than just a diversified stock portfolio. It involves different classes. [Here’s]( your chance to look into the future of investing and wealth building… In this [all-new, FREE online event]( I’ll take part in a critical discussion about stocks, real estate, cryptos, gold... and more! I’ll also be joined by my wife Kim and two of the most respected minds in finance and investing — Nomi Prins and Jim Rickards. In this event, you’ll learn strategies you can apply to your life and investing — regardless of your experience level. [Click here now to see the critical Future of Wealth Building — again, 100% FREE!]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Robert Kiyosaki][Robert Kiyosaki]( author of bestseller Rich Dad Poor Dad as well as 25 others financial guide books, has spent his career working as a financial educator, entrepreneur, successful investor, real estate mogul, and motivational speaker, all while running the Rich Dad Company. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! Follow us on social media: [Facebook]( [LinkedIn]( [Twitter]( [RSS Feed]( [YouTube]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [unsubscribe here.]( Please read our [Privacy Statement](. For any further comments or concerns please email us at [feedback@dailyreckoning.com](mailto:feedbackdailyproof@dailyreckoning.com). If you are having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox [by whitelisting The Daily Reckoning.]( [Paradigm Press]© 2021 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. We expressly forbid our writers from having a financial interest in any security they personally recommend to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Email Reference ID: 470DRED01