By Brad Thomason, CPA
So I got a speeding ticket the other day. My three kids, all of whom are teenagers, were in the car with me when it happened. I did not ask specifically, but I would not be surprised to learn that, from their perspective, it is the funniest thing they’ve witnessed all year. Give them credit for having gotten most of their laughing out of the way by the time I did the walk of shame back from the trooper’s car.
I have made the point to my kids on numerous occasions that the implication of “nobody’s perfect” is that otherwise intelligent persons do dumb things from time to time. In fact, I have even presented human history itself as being more or less the story of what happens when people who know what to do, do something else. Clearly, I’m no more immune than anyone else.
Another thing that people know they should do, but often don’t, is diversify their holdings. Maybe it’s because they have “more important things to think about.” Maybe it’s because the current allocation has been doing quite well (thank you very much) and they are going to hang around to get some more.
Which, if you press them, they will admit, are not very good reasons.
Diversification is a key defensive step which we use to limit the possibility that a single, negative event gets a chance to do us too much damage.
But what’s less understood is the role that diversification plays in the compounding of earnings. When an investment makes money or gains value, that win doesn’t always get turned into new investment capital without some help from you. In other words, just because you got a return, doesn’t mean it got compounded.
And since compounding is the long-term growth engine, that matters.
When we take some of our winnings from investment A and use them to increase our holdings of B, C and D, then we have both protected those wins from exposure in the place where they were made, and put those dollars to work in pursuit of new wins in the future. It’s basically two sides of the same coin; despite the fact that the one side is about all you ever hear discussed.
When was the last time you rebalanced your portfolio? Is your current allocation mix anywhere close to what your plan calls for? Have you even thought about asset-class composition in the first place?
If you find yourself thinking that you would prefer not to have to answer any of those questions out loud, you know what you ought to do.
My lapse in doing what I knew to do cost me eighty-five bucks (you’re welcome South Dakota…). Your lapse could cost you a whole lot more than that.
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