Diversification Is for Old People

Millions of articles are written about investment strategies. One that almost all commentators speak to is diversification -- the idea that since you cannot predict the return on investment from any one asset category, you should hedge your bets by spreading your investments. And, you need to revisit these allocations as you age or as your situation changes. As an example, all strategists suggest that people move out of equities and into bonds as they move toward retirement -- trading risk for predictability of return.

One strategy, however, that none of the commentators speak to is human investment -- how much of your income, assets, energy and focus should go into YOU -- your human capital. Here is my thinking on this subject:

Buying what I call third-party assets -- equities, bonds, CD's, real estate -- should not begin until you are at least thirty years of age. Prior to that every dollar you have should go into making YOU as productive and valuable as possible. That may mean education. It may mean taking a job with little present return but lots of upside. It may mean entrepreneuring -- starting your own venture. It does not mean depending on someone else or outside forces to increase your net worth, i.e. third-party assets.

Forget diversification. In the first 10 or 12 years of your adulthood, put all you have into YOU. Make yourself as valuable a commodity as possible and the other assets will follow. Diversification is for people who already have a career, who are already outearning their expenses, who need to protect against the future. Anyone under 30 has a much bigger concern -- building his or her human capital to its maximum level. And that means 100% of his/her energy, capital and focus should be investment in just ONE asset category.

Jim Randel is the Founder of The Skinny On™ book series. See www.theskinnyon.com.

 

 

 

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Comments

[AmbitiousMamas]

09:00 PM on 06/26/2010

The financial crisis has taught us that the concept of a skill for life does not translate into a job for life anymore. The scale of the crisis means that our children will be paying for the financial damage done when they reach adulthood. It is entirely logical that people under the age of 30 ought to be investing in a skills (plural) set that will equip them to meet the changing demands of the workplace environment. Companies are having to face fluid competition resulting from globalisation and the emerging economics of the world and will need a workforce that can adapt quickly, efficiently and easily. The educational establishments face a greater role than they ever did in teaching and imparting these skills to students. It has to be a joined up effort. Parents have to take responsibility too especially in ensuring that youngsters have sufficient life skills to cope with the challenge of becoming multi-skilled. Traits such as being organised and being emotionally resillient enough to cope with a changing world can only be taught at home.

[48thGuy]

10:29 AM on 06/26/2010

Whoa Jim!....You are missing the point of asset gathering...It's obvious that 401-Ks and IRAs have been losers this past decade, but so has the cost of a college education when taken into the context of employment...
Income real estate at any age, especially for the young will pay off handsomely over the course of a lifetime..I'm not knocking education, we all need smarts and smooths...
But, a really intelligent 25 year old will buy an income building and he'll rent to all the smarts and smooths out there..

[TheWorldBlowsUpTommorow]

01:35 AM on 06/20/2010

I'm 18 years old, just fresh out of college with little actual skill, and this was a refreshing article. Thank you.