It’s hard to diversify. Everyone talks about it as if it is the Holy Grail of successful investing, and I have yet to run into an investor who hasn’t acknowledged the benefits of a well-diversified portfolio.
The problem is that, at least in the short run, it is not very much fun or sexy to be in a properly diversified asset allocation model.
We all know people who have made a fortune through investing and most of them hit a home run on one big deal, not through an interlocking sequence of investments that offset each others risk profile to smooth out your expected return. All that fancy talk really means is that you will never hit that big home run in a well diversified portfolio.
And isn’t that what most of us really want to do? We want to hit home runs. We want the big play.
People don’t watch the National Football League to see teams run the ball up the middle for two or three yards a play. They watch in hopes of seeing the long pass to the end zone. We are a culture that wants immediate gratification — and a lot of it.
That’s why it is so hard to get young workers to put money in their retirement fund. It’s money they won’t see again for 40 years. Who wants to do that?
Not on your side
I don’t really have a problem with people taking risks when they are young and can afford to recover from the inevitable bad decision that plagues so many of the non-diversified.
But the statistics are just not in your favor. It is so easy to get on the wrong side of an investment and lose what you have worked so hard to gain.
By the time most investors start investing, they have done so because they are married and have children and realize that they better get going or their kids won’t have a choice of college. When you get to that point, the consequences are just too great to risk it all.
I was thinking the other day of how I can apply this concept to real life so readers can have a clearer understanding of what I mean. I thought of my hometown in Tupelo and how the Community Development Foundation (CDF) has had a diversification strategy for attracting new businesses for a long time.
I remember back in the 1980s when Harry Martin explained to the CDF Business Roundtable that we didn’t want to have too many businesses doing the same thing because of the economic risk it would create for our community if that industry didn’t work out.
Currently, we have more than 50 Fortune 500 companies in the Tupelo/Lee County area and we have one of the most solid economic bases in the state. Interestingly, Tupelo has developed an exposure to the furniture business that has paid off well for our area in the past two decades.
But it has also increased our economic risk considerably, and we are starting to see the price of that risk as paid employees in the furniture business have been cut by a third in the past 10 years.
We are having to work hard to retrain our work force to make our area more attractive to other industries as the consolidation and globalization of the furniture business continues to have an impact to our economy.
As I consider the other side of the coin, I have to think about Iuka. Iuka had a windfall when the Yellow Creek Nuclear plant was built just outside of town at Pickwick Lake.
With high-paying jobs, good benefits and a need for workers, Yellow Creek gained most of the workforce in the area. That was great while it lasted, but when Yellow Creek shut down a third of the work force was jobless. It was bad until the NASA Solid Rocket Booster plant moved into Yellow Creek and things were rolling again.
That is, until the Solid Rocket Booster plant shut down.
This cycle of feast and famine has made it very difficult for Iuka and the towns in that area of our state to survive, much less thrive.
However, there has been more press for the Solid Rocket Booster plant than we ever could expect for most of the companies in Lee County. They are sexy and there is a sense of pride in having them in our state.
But in the long term we need diversification, just as you need diversification so you will have a feeling of security when you plan for your children’s future and your own retirement.
Contact MBJ contributing columnist Scott Reed, CIMA, CWA, AIF, of Hilliard Lyons, member NYSE & SIPC, in Tupelo at firstname.lastname@example.org. Hilliard Lyons does not offer tax advice. Please consult your tax advisor before making any decision that may affect your tax situation.