Durham Real Estate Investors Club
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The Risk of Diversification

  • Ignorance is a risk
  • Lack of control is a risk
  • Not knowing how to add value is a risk
  • Getting investment advice from those who get a commission from selling the investment is a risk
  • Deworsification is a risk

The average parent tell their children to learn a trade, get a college, or university degree and get a good job, work hard, save money, buy a house and spend the rest of your life paying off the mortgage. Although well meaning, parents are teaching their children to earn an income, not create wealth.  This means they will always need to have a job.

Despite what some people will tell you, is it is very challenging for somebody to save their way to wealth. You need to have your money continually working for you so that your monthly income grows, instead of you earning income for every hour you spend at a job.

Many parents will push their kids to pay off their debts. This is not always a bad thing like referring to bad debts that depreciate in value like clothing, a car, or taking a vacation. But often they are lumped in with good debt, that allows a person to build wealth. Those who acquire real assets that appreciate in value over time, which also helps your net worth to grow.

Having that debt is not a bad thing, when the asset pays for itself. For example, tenants pay rent which helps to pay down the asset. After 30 years of this, the mortgage on your asset is paid off, and the asset continues to provides income that you can use every month.

Unless you have inherited your wealth, you can’t realistically grow your net worth without borrowing money to invest. In the case of a house, we use the bank to borrow 80% of the funds through a mortgage. Leverage is a wealth accelerator.

When you focus on creating foundational wealth, you then have the security and freedom that allows you to have enough money to do all the things you want to do for as many years as you want to do it. Your wealth gives you a stream of income. You will not have to rely on the government or a third-party for those funds.

Instead, we are often sold a net worth number. For example, your financial advisor may say to you that you need to save $2,000,000 over the next 40 years, and “if” you get 4% into retirement that will give you the income of $80,000 amount yearly which will provide you with the income to retire. These financial professionals often proclaim that a diversified portfolio of mutual funds or ETFs will produce this result, and you need to save 10-20% of your income every month to achieve your net worth goal.

The goal of diversification is not to make or grow wealth, it is simply to keep what you already have. You have the propensity of spreading your investments thinly over such a large amount of investments that you don’t understand, rather than focusing a few investments where you have a lot more control.

“Keep all your eggs in one basket, but watch that basket closely.”

Warren Buffett

Here is a quick and easy shortcut quick to this process. Create the income that you need now, not in 40 years from now. Figure out what your financial reedom number is. Take your total monthly personal expenses, subtract your monthly saving and investment contributions and you get an amount that is your financial freedom number.

Total Personal Expenses – Monthly Savings – Investment Contributions = Financial Freedom Number

Now find others who have actually done this already. When you follow a proven path that has already been established the process becomes much easier.

Something that is risky for one person may be very low risk for another person becasue of their knowledge and experience. Would you want your carpenter doing open heart surgery on you or an experienced cardiologist. And the opposite can be true for the Cardiologist, you would not want them framing your new house. If you don’t have knowledge,
control, and understanding of something – the higher your risk.

Cash flow is more important than the accumulation of a net worth number. Often net worth is a consistent by-product of good cash flowing assets. Use assest like real estate and create focused investments rather than diversifying into unknown areas where you have little knowledge, understanding and control.

About the Author Quentin DSouza

Quentin D’Souza is the Chief Education Officer of the Durham Real Estate Investor Club. Author of The Property Management Toolbox: A How-To Guide for Ontario Real Estate Investors and Landlords and The Ultimate Wealth Strategy: Your Complete Guide to Buying, Fixing, Refinancing, and Renting Real Estate. And a Real Estate Investment Coach details at Real Estate Mastermind and Coaching.

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