As many of you might have heard today, diversification and investing for the long term has been regarded as the way to get rich. This piece of advice has been circulated for very long. However, I deem this to be a financial fairy tale. Now, I will bust this myth because I do not think that it can make you rich.
To start, I believe that investing for the long term is flawed because words have different meanings to different investors. For the amateur investor, long term can mean decades whereas for sophisticated investors, it can mean a day or even an hour. Covering up this underlying difference, many of the rich use their salespeople to spread this lie, duping the financially illiterate to park their money for the long term while they eat off this money via fees.
One clear example would be mutual funds where investors pay 100% capital, take 100% risk and earn 20% of the profits. The remaining 80% of the profits is subsequently siphoned off by the fund managers via fees and commissions for their picking the right stock. Here, as more people invest in these financial tools, the rich will get richer and if you put your money in there for the long term, these financial predators will devour your money bit by bit until you are left with bones.
While not all of the rich are such people, many of them do such things to remain rich and one thing that fueling this would be people’s gullibility and financial illiteracy. Hence, I believe that it is wrong to invest for the long term. Why let people prey on your money when you can use it yourself?
Now, I will move on to exploring why diversification is not good for your financial health. Warren Buffet once said that diversification is a protection against ignorance and I deem this to be rather true. Today, most financial advisers recommend diversification because this allows them to sell more and evenly spread their risk if they are wrong. This would be to their advantage as these salespeople will be able to earn more commissions from you by putting on the cloak of being an expert. Because of this, they continually preach about the benefits of diversification to convince people to hand over their money to them.
To add on, diversification is wasteful of your money because investments like mutual funds which these people sell are already diversified in paper assets. Thus, if you buy 3 different funds, you may buy 3 same stocks they own. This is rather unwise because you probably can work your money’s magic elsewhere.
In addition, diversification would also mean different concepts to different types of investors. For the greenhorns, it would mean investing in different stocks. However, for the pro investors, this same word would mean investing in businesses, income-producing real estate, paper assets and commodities (like silver and gold). Most financial planners do not tell you this because they are only licensed to sell paper assets which you may not need. To me, this is a flawed definition of diversification that is being circulated around to con people of their money and I hope you will be more educated financially after reading the facts above.
Hence, to conclude, I believe investors now have a clearer idea of how to differentiate between good and bad financial advice. Now, your next step to greater wealth would be to enrich yourself with financial knowledge.