The risk of not being diversified.
What’s your financial backup plan? Whether in life or for investing there are risks if you aren’t truly diversified. It correlates to having all your eggs in the one basket. We could be talking about what happens to the household if the main breadwinner stops bringing home the money. What if the one that earns all the income to pay for the family’s monthly bills, suddenly becomes ill or injured and cannot work? What happens then?
How long would you be able to survive?
Do you have any savings or investments to fall back on, to last one month, three months or a year or more? What is your financial backup plan for when things go wrong?
When we look at our retirement are we relying on the government’s aged pension to live on? It is getting harder to qualify for the aged pension and the age goal posts keep changing? It used to be 65, now it’s 67 and in the future, 70 is predicted. Do you want to work until you are 70? Perhaps your employer has a pension plan for employees that you are counting on? What happens if the company closes, moves work offshore, goes broke and the employee benefits disappear? Do you also have some savings, some investments that you have accumulated over the years that you can count on?
Diversification means the action of making or becoming more diverse or varied. Farmers are encouraged to start planning diversification of crops. The logic being if their crop fails then they are spreading their risk against price and seasonal conditions by having two or more different crops.
The farm where I live used to grow mangoes and made good money out of them 20 years ago. However, when a different growing region started getting their mango crop to market earlier they took the best early prices and made it unprofitable for the other regions. Same applies when you only have one crop it means you can grow the crop efficiently however it also means if the price for that crop is down that year of harvest then the whole district suffers. The growers/farmers have less money to live off for that year and flows on through to the shop keepers in town with sales down as less money is being spent.
What does this mean for us?
On an episode of the Retire Well Retire Happy Podcast, my guest was Paul Engeman from Ainslie Bullion. Paul believes we should be aware of what true financial diversification means and what could happen when you have all your investing retirement eggs in the one basket. I love podcasting as I am always learning something new. Come and take a listen, and learn why you should know some new terms like counterparty risk!