When It’s Hardest, and Most Important, To Diversify | Old Peak Finance: Wealth Management for Executives and Retirees

When It’s Hardest, and Most Important, To Diversify

October 31, 2024

Importance of diversification

When It’s Hardest, and Most Important, To Diversify

October 31, 2024

We preach the virtues of diversifying all the time. If you have read any of our blogs, you are tired of hearing about it. You get it. You agree. You are doing it.

I have found, however, that there’s one situation when people are most likely to pay lip service to diversification but make big, concentrated bets. And it’s when diversifying is most important.

People are least likely to diversify when it comes to investing in their own backyard: buying their own company’s stock, buying stocks in the industry in which they work, or even buying stocks from the country they know best.

I learned this the hard way. My first career was as a banker in Asia, where we lived for 15 years. I worked across ten countries in the region, most of which had bright economic prospects: Hong Kong, China, Korea, Taiwan, India, Singapore, and several south and southeast Asian countries. I traveled regularly to those countries. I liked the countries and the people. I had an incredible opportunity to work with senior business and government officials. I believed in their futures. So, what did I do? I overweighted my investment portfolio to Asia. That’s because I “knew” something I thought most investors didn’t know: the future was in Asia.

This was a mistake, for two reasons.

  1. I incorrectly assumed I knew more than other investors. In fact, hundreds of billions of dollars had already discovered the Asian growth story. The Asian opportunity was factored into stock prices.
  2. I already had too much of my financial future tied to Asia, through my job as a banker to Asian companies and governments. The smarter step would have been to under-weight Asia, not over-weight it.

It is so easy to bet on what you know and what you’re comfortable with. It’s also a way of patting yourself on the back: “I’m so smart to be working for Company XYZ or in Industry ABC. If I don’t buy stock, I am doubting myself, and I can’t doubt my own judgment.”

We’re all human (well, except for the bots that will be writing this column before I know it). And it’s great to believe in yourself. But because we’re all human, it’s smarter to hedge our bets.

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