Wednesday, April 28, 2010

Diversification

I could have a closet filled with every possible type of polo t-shirt, but all I would have is a diversified collection of polo t-shirts. When people refer to diversification they usually are referring to a mixture of stocks and asset classes. A person's 401(k) or 403(b) has very minimal options for diversification, but they are "diversified."

In these accounts, and most other investment accounts, most people just have a diversified collection of Polo t-shirts. What I mean is that they have a diversified stock portfolio. The fact of the matter is that stocks are only one asset class. If someone only owns one asset class then they are not diversified.

You might say, "What about bonds, and precious metals?" So now you have a dress shirt to go with you Polo Shirt collection. It's better, you are starting to see the point and get a little bit more diversification, but it's not enough.

The problem is that most people don't look at their entire financial picture. They only see what they think they think they need to. If they step back they might be reminded about their dresser, maybe a bureau or armoire. Who knows, maybe they even have a closet just for shoes. The point is that there is more to a wardrobe than polo shirts just like their is more to your financial picture than you investment portfolio.

Every where your money goes is part of your financial picture, and every part of your financial picture has an effect on your financial goals. So, when you are setting financial goals and trying to make a decision about money, remember to consider your entire financial picture.

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