Please use the menu below to navigate to any article section:
Common wisdom seems to suggest that you should diversify your investments.
But is this correct?
In my opinion it is wrong, in fact I remember reading Napoleon Hill’s great book Think and Grow Rich many years ago where he also said that successful people specialise in one area they don’t diversify.
On the other hand you will find many financial planners telling you to diversify for your own protection.
What they fail to tell you is that it is also for their protection.
Since most financial advisors cannot tell you exactly which share or managed fund is a great investment, they tell you to buy a bunch of them.
Warren Buffett, one of the world’s greatest investors, said:
“Diversification is a protection against ignorance.
It makes very little sense for those who know what they are doing.”
Instead of diversifying, strategic investors focus on finding the best investments.
In my mind diversification leads to averageness – bottom of the best and cream of the bottom.
In my experience I’ve found that wealthy and successful people – be they a business person, entrepreneur or investor – have one in thing in common, they specialise.
They all focus their concentration on one single earning activity.
They eventually became exceptional in that one activity by continuously improving their skills and increasing their knowledge in that one activity.
Despite the myth going around that it is good to have multiple streams of income the wealthy very rarely engaged in multiple earning activities.
I remember one astute colleague telling me “If I try to do five things to earn money, I will lose money in all five things. So I focus on doing one thing really well.”
If you look at anyone who has achieved great success and wealth, they have all focused intensely in order to win.
One of the reasons the rich get richer is because they are focusing, while the middle class is diversifying, and the poor are counting on the pension.
First they concentrate, then they reinvest
Another thing the successful people all had in common was that they reinvested the money they “earned” from that one activity into passive investments – most often real estate.
They kept building their asset base so that it would one day provides them “unearned income” – income they do not have to work for.
The lesson from this is to specialise and concentrate your activities on something you can become good at.
Then invest your income into high-growth assets building your asset base until you have your own cash machine.
You will never become wealthy by working for your money; you can only become wealthy if your money works for you while you’re asleep.
Just to make things clear… once you become good at investing in real estate, there is no reason why you shouldn’t diversify into asset classes, in fact there are good reasons why you should, but first of all become an expert at one thing.
I believe your “end game” should be to own your own home with no debt; have a property portfolio that is leveraged to a degree that it produces sufficient cash flow to at least service its debt; and have other cash flow producing assets which could include commercial real estate, shares managed funds or superannuation.
So my suggestion is become an expert in one asset class first (concentrate first), then diversify.
As your property portfolio grows in size here are some areas in which you can diversify:
- Diversify lenders – Just as banks worry about “concentration risk” if they have lent you money for “too many properties”, it doesn’t make sense to have lender loyalty – spread your risks by using a number of banks
- Diversify loan terms and types – Protect yourself from interest rate fluctuations by having some loans fixed and some with variable interest rates. if you only have one loan you can split it into both fixed and variable in most cases
- Diversify your investments across different states to take advantage of their individual cycles
- Tenant and property types – I own residential, commercial and industrial properties, apartments and townhouses
If you’re looking at buying your next home or investment property here’s 4 ways we can help you:
Sure our property markets are improving, but correct property selection is even more important than ever, as only selected sectors of the market are likely to outperform.
Why not get the independent team of property strategists and buyers’ agents at Metropole to help level the playing field for you?
We help our clients grow, protect and pass on their wealth through a range of services including:
- Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family. Planning is bringing the future into the present so you can do something about it now! Click here to learn more
- Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $3Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective – that’s something money just can’t buy. We’ll help you find your next home or an investment grade property. Click here to learn how we can help you.
- Wealth Advisory – We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.
- Property Management – Our stress free property management services help you maximise your property returns. Click here to find out why our clients enjoy a vacancy rate considerably below the market average, our tenants stay an average of 3 years and our properties lease 10 days faster than the market average.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.