Next-Level Diversification – Part Four

In this final post about diversification, we look at how to use diversification to your advantage, and not let it complicate your wealth-building.

Don’t let Diversification Dilute Your Wealth-Building

It’s important to strike a balance between healthy diversification and unnecessary complexity. You could add all kinds of things into your investment mix, but my contention is that diversification isn’t really the main reason to do this.

If you want to add in a Japan fund as a satellite holding, then do so, but because you want to, because you’re interested in Japanese markets, and NOT to diversify. If you have a multi-asset holding, you’ll have exposure to Japan anyway, so only do this if you want to, not for any other reason.

I see no reason to add in unnecessary complexity, even as our wealth builds to significant levels. Doing so adds costs like added dealing fees, and perhaps added fund management charges. And it certainly adds a time cost in researching and maintaining a more complex portfolio.

In J L Collins’ book ‘The Simple Path to Wealth’, he suggests holding everything you own in (at most) two funds. I have clients who have multiple seven figures in a mere handful of funds. Most of us will never get to that level of wealth, so we mustn’t feel the need to diversify for its own sake.

Too much diversification can dilute what you’re trying to do by distracting you from the true purpose of your money which is to grow in as low-cost and low-tax environment as possible so as to meet your goals.

I promised you next-level diversification – the dirty secret here is that I think it’s possible for anyone to largely ignore the kind of diversification we expect will do us good. So, if you go multi-asset, multi-jurisdiction with your investments; exactly the kind of passive, multi-asset approach I always talk about, make sure the funds you are investing in hold physical assets which are liquid.

Stay away from complex, potentially illiquid investments such as those found in the Woodford funds. Keep costs low at every stage of the journey. Use all the tax-breaks available to you. There is literally nothing else you need to do to invest wisely.

You don’t need to hold property, add satellite holdings or to venture outside of pensions and ISAs, but you can if you want, and if your tax situation warrants it. Keep your life simple – you’re far more likely to stay the course that way.

OK, that's it for diversification. If you want to review the last post, you can find it here. Otherwise, we're moving on to what I've termed rolling with the punches. Let's go!