Tuesday, December 16, 2008

Defining Diversification

If you've managed to read any financial news in the US in the last 72 hours, then you have no doubt read about Bernard Madoff's $50 billion ponzi scheme! How many times have we heard the #1 financial principle "don't put all of your eggs in one basket" or to sum it up in one word "diversify?"

Many wealthy individuals, charitable trusts, family trusts, and other entities lost a substantial if not all of their wealth by investing with Mr. Madoff's company. (http://www.usatoday.com/money/industries/brokerage/2008-12-15-madoff-scam-ponzi_N.htm). Each time something like this happens (think Enron), we are reminded that our investments should be diversified. I used to think that diversification meant that you should not have a substantial amount of your investments in single stocks. I thought that if I had several well diversified mutual funds (i.e. industry specific, international, growth, balanced, etc) that I was properly mitigating my risk. Thanks to Mr. Madoff, I am beginning to redefine my thoughts on being diversified.

Currently 90% of my savings is in the stock market one way or another (401K, Roth IRA & Money Market Fund). Suddenly I'm not feeling so diversified, I mean all of my money is in the stock market one way or another. I know that I may be diversified within the stock market, but still, all of my eggs are in one basket. Being a woman of action, I am now on a quest to reallocate some eggs into other baskets...what baskets...that's the homework.

Are all of your eggs in one basket? How do you define diversification?

5 comments:

Shtinkykat said...

Like you, most of my money is tied into stocks, ETFs and mutual funds. But since I'm not touching any of that in the near future, I'm content keeping it there. I've recently started purchasing Savings Bonds but the amount is so little ($25/month), it's really not helping much with diversification. Finally, with the financial institutions teetering, I've also diversified banks/institutes at where I keep my money.
P.S. I LOVE your blog design and your blog is great!

Mark said...

I think of diversification as dividing investments among different asset classes..stocks, bonds, real estate, metals, commodities. Bonds give you guaranteed income when other asset classes struggle.

J. Money said...

amen sister! diversification is key for sure...and i'm also w/ Shtinkykat - not touching it for years so i'm not gonna freak out just yet, although it's starting to get harder not too ;)

Ms. MoneyChat said...

Shtinkykat: Yep, not touching it for years to come but I am thinking about creating new baskets to invest. I'm not sure what those baskets are so when I figure it all out, I'll be sure to post about it;-)

Mark: Exactly how I used to define diversification but now I'm beginning to see that as a partial definition. I think I want more baskets other than securities now.

JMoney: I'm so tempted not to open my statements for the next couple of quarters. Like I told Shtinkykat & Mark, I'm just looking for a little more diversification beyond securities. Thinking about cases like Enron and Bernard Madoff makes me think a little beyond securities.

Sharon Rose said...

Hi there-I've only really my pension which is in stock markets, so I'll have to ride the storm. Thanks for your well wishes too!