[Originally published on Feb 2, 2009]
For our entire lives, most of us have depended on highly centralized systems. Our food comes from a thousand or more miles away. Our savings is shipped into distant financial centers and invested by strangers in enterprises run by strangers. We watch highly scripted news that serves the same spin no matter how many channels we try. We bank at impersonal global banks with criminal records that would make a felon blush and have no idea where our money goes, just that the government guarantees that we will get it back.
Within this centralized system, diversification means having your financial assets deposited into a “one-stop-shop” brokerage account invested in securities representing different global industries, the idea being when one industry is doing poorly, another “countercyclical” industry would be doing well.
But suddenly, we find that we may not be able to trust these centralized systems. Suddenly, traditional portfolio theory no longer addresses our anxiety. This is because we need to shift from diversification within a centralized system to real diversification in a decentralized, possibly “out of control” world.
If you study the investment patterns of families and wealth that has survived through the generations, including through periods of lawlessness and warfare, you come to understand that for those who want to thrive in all economic and political scenarios, diversification has had a far deeper meaning than what is commonly understood in the financial markets today. For the astute strategist, it means not putting all your eggs in one basket in every important aspect of your life. Given what is happening in our world and economy, it’s time to revisit the deeper meaning of diversification.
Diversification means that our assets are invested such that an economic, political, or natural event — particularly a catastrophic event — cannot wipe us out. So, for example, we don’t invest all of our savings in a single financial institution or fund. Investors who lost their life savings in the Madoff scandal were not practicing even the most basic form of financial diversification.
Diversification also means having multiple types of assets and custodians in multiple places. Custodians (i.e., those who hold our assets for us) might be brokerage firms, banks, depositories or our own safe.
Diversification by place means locating our assets in states or countries subject to different legal and political risks. It means denominating our assets in currencies of multiple countries. It means selecting assets subject to different risks of loss due to climate change, weather conditions, social conditions and other uniquely local vicissitudes. Local investment is a great idea, but the people who lived through Katrina can tell you why having all of your eggs in one local basket may not be the best idea.
Diversification means that we don’t have all of our savings in just one type of asset. So we don’t invest in securities only — we also invest in tangibles. If possible, we buy a house without debt, or with debt that can be serviced by one family member’s income, or invest in our home to lower energy and food costs permanently. We also maintain a sufficient inventory of household goods. And it’s a good idea to invest in disaster preparedness if we live in an area that experiences earthquakes, floods, hurricanes, or tornadoes or is prone to power outages.
Having all your money in one currency or one country is pretty risky – a risk many in the US tend to take. Ask your Jewish friends whose parents got out of Germany in time because they had gold coins or family and assets abroad. Gold coins may hold their value if the dollar collapses, but they can also disappear in a burglary or if you forget where you put them. Digital gold may be a great thing, but if the Internet is not reliable where you are, cold cash may be a good thing. Or if your cash is worthless, a stockpile of food, vitamins and liquor can be priceless. However, food, vitamins and liquor are only good when you are bartering with someone who wants them or is close by. Which takes us back to gold coins or digital gold or some other currencies. So you see, there is no magic bullet – just diversification.
Diversification of life risks is an integral part of all matters related to financial capital. Living things are the source of all wealth. That includes you and me.
Diversification means that we invest in our physical and mental well-being. We invest our time in understanding the toxic chemicals, drugs and other influences that increasingly contribute to poor health and cause us to need so much more funding for more drugs and medical treatments to cure what ails us. One of the greatest – and growing — threats to our financial health is physical illness. The notion that corporate stock investments will create security while one saves money eating unhealthy food is contradictory to the principles of building real wealth.
Diversification means that we invest not just in our own human capital but also in the human capital of other members of our family and those around us. In this way, we are not betting on financial assets alone to see us through. We are investing in each other because it is family, friends and communities that help see us through. An active network of mutually-supportive friends and colleagues is important. For those with sufficient capital and skills, financing the farmers and companies we depend on for our daily bread may not provide much of a return — it may, however, ensure that we have healthy, safe food.
Diversification also applies to the work we do. For most people, our labor is our most important source of financial assets. Skill diversity can mean, for example, that you have a number of skills. If one skill goes out of favor, another will give you the ability to be economically useful. If you have a business that fails, you have the ability to start a new business because you have the experience and diversity of skills to make a business run.
The ability to generate income through your own business or practice is invaluable, particularly when the economic environment makes “W-2” employment more difficult to find. If you are an employee and your company closes, if you have taken care to broaden your skill base, your skills can be valuable commodities for other, different types of employers or employers in other industries or places less affected by a downturn. Better yet, you know how to do many things for yourself, thus offsetting lost income with lower expenses. Look at those who are successful in the current environment: what most of them share is a commitment to life-long learning that translates into a multitude of personal and professional skills.
Diversification is not always easy to achieve. The more resources we have, the easier it is to diversify. The fewer resources we have, the more our diversification focuses on building our human capital and community. Interestingly enough, many of the best opportunities before us are those that can happen when people who have a lot of money and people who don’t have money but have a lot of skills become allies in building greater diversification together. Isolation shrinks our options. Opportunities expand as we organize and collaborate effectively. Hence, it is critical to not assume financial capital can provide sufficient diversification alone and remain isolated from our neighbors and family.
One of my goals for the Solari Report is to explore options we have to strengthen and diversify our human and financial capital and to introduce you to leaders who are taking action to help us do so. This week, I will be reviewing recent financial events and discussing indications that more and more people are concerned about a financial coup d’etat.
Related Reading:
Constantinople was the longest lived civilization in human history at 800 years. They tinkered with inflation ONE time and never did it again. Their coins were universally valued.
Look at my blog entry in 2006 as I am smarter than most people in banking that made 12 million a year and lost 50 billion in revenue.
You are absolutely right Loren. Take religion out of it and many of the problems go away. I’ve found the closer one holds their space god the more likely they are to kill, remember the words of George Carlin – “Murder…religion has never really had a big problem with murder. More people have been killed in the name of god than for any other reason. The more devout they are, the more they see murder as being negotiable. It depends on who’s doin the killin’ and who’s gettin’ killed.”
There are many more rationalists out there than you think – EXPRESS YOURSELF!
Larry:
I’m with you. Let it blow. If someone robs my house, the solution is not to then write them an additional check.
Catherine
Dear Catherine, (love that name, it was also my mother’s)
Speaking diversification, I have to say that wandering around the Internet it is amazing and gratifying to see the prolific amount of diversification in the way people address the problems of the day. To these tired old eyes (eighty years and still counting) the increasing numbers of commentators and the diversity of their positions is a source of comfort. Regardless of the clashes of opinion it is at once hopeful and productive that so many minds are contemplating the world around them. To add to the discourse, I would say there is a fundamental problem underlying every position pro and con on every subject that gets hammered on. That has to do with control. Most do not recognize the simplicity of how the entire system both here and abroad is controlled. We have seen perhaps the greatest manifestation of this control in our lifetimes happen right in front,as the old saying goes, of God and everybody. That of course is the so called bank bailout. We simply watched and accepted bankers taking taxpayer (present and future) money and giving it to themselves. This strikes at the heart of identifying those in control, namely the bankers. Just go back and review how the Federal Reserve and the Income tax (which are joined at the hip) came to be. That clandestine meeting of bankers at Jekyl Island brought forth, as Griffith so aptly named it, The Creature. That Creature is The God of the day. Only that God is the Devil himself. Those same people formed the infamous Council on Foreign Relations to insure their misbegotten creation endures. E Mandel House foretold of the plan in his 1912 epic Phillip Dru, Administrator. The plan was simple and easy for him and others like him to implement. It consists of three legs all of which have been firmly entrenched in the American firmament. These of course are: the creation of a central bank, the imposition of an income tax, and lastly, total control of the two major political parties. The first two are obvious and their existence is generally recognized. As to the third, not too many people realize that no matter who is voted into office they are and have to be members of the CFR or one of its related secret societies. It would do all commentators well, regardless of their particular passions, to get on the same page in so far as this issue is concerned. It has to be fundamentally understood by all well meaning commentators that control of our government, and hence of our way of life, is in the hands of these evil devils. Until they’re driven out of existence, most likely on the end of ropes, we cannot hope to correct the situation we are currently in. It is a well known fact that the worldwide derivative financial bomb adds up to six hundred trillion dollars. That’s forty times the GDP of this once great country. To throw a few trillion taxpayer dollars at it is exactly like tossing our money into a black hole. One has to recognize just how necessary it is to, as Nancy Regan once said, Just Say No! Let that bomb go off where it will do the most good and the least harm to the rest of us. Will it affect us? Sure, but not as much as if we let our hard earned monies be used to try and defuse it. I say, stand back and let it blow.
Good luck to all in spite of what we have to put up with, and God bless all the commentators.
Larry TM
Thom Allen,
Thanks for providing an alternative expert opinion on the Argentinian situation. As I said, I’m not an expert, so I appreciate your input very much. Can you comment on the books Mariano Muruzabal references? Are they also transparently economic colonial propaganda? I would appreciate your opinion on the matter. And I’m sorry you misunderstood my description of Ms. Klein as derisive. It wasn’t intended that way. If you are as opposed to colonialism as you appear to be, you will certainly appreciate how our view of colonialization has been horribly warped by the writings of influential priveleged Europeans. I’m glad to know you don’t think Klein fits that mold. Now I can start reading the copy of “The Shock Doctrine” I received for Christmas without so much skepticism.
Hi. I must say that if anyone insists that Jesus and or god is the answer to these problems consider this………… If you want to know the truth you must question those things you hold most dear to your heart. PERIOD. Please don’t waste my time with rebuke. 40 plus years of research and study. I KNOW WHAT I’M TALKING ABOUT. Christianity is responsible for destroying the planet. Your very best efforts to do any good will fail and at 84% of the U.S. population, you have Obama to show for it. Wake up you childish people. Your country is a mess because of YOU and your religion. If you want to go toe to toe with me with anything you have, I’m ready to go with you. If any one person is anti Christ, I hope it is ME. I hope I will stand out as the one person who will fight the GOOD fight against you deluded, insane people. If there is a god who created us, this god should be tried in court for crimes against humanity a thousand times over. You are a sick perverted people to have taken such a fraud as Christianity and embraced it without due care and consideration for the destruction it has caused for so many centuries. I will predict that you will fail to change anything on this planet for 2 reasons. 1. you and your god CAN”T and won’t. 2. You don’t want to and so you won’t even try.