In Investments, in Career, in Life: Diversify, Diversify, Diversify

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Someone I look up to once told me that he ‘wouldn’t celebrate diversity for diversity’s sake’. I was a little taken aback, as I’ve found diversity to be extremely useful in most aspects of my life. I found this even more bizarre because he worked in finance, and diversification is some of the most basic investment advice. You diversify your portfolio and see the clear benefits there – why not diversify your coworkers as well?

There’s a clear counterargument: investments are very different than the people you spend your time with.

However the way I see it, diversity and diversification (the act of creating diversity) provide largely the same value across all areas of life, because diversification inherently decreases risk by providing more opportunities or ‘rolls of the dice.’

We’re going to use a lot of metaphors today. We’ve all heard the expression ‘Don’t put all your eggs in one basket,’ and most of us understand what that means with money, but what does it mean with our careers, habits, hobbies, friendships – the way we spend our time?

Win Big, Lose Big

Most of us have undiversified income streams: we rely on one source of income, usually W2 income, to pay our bills. We’ve been coached through life that this method of income is the most stable and secure, so we focus on it. On the other hand, an event none of us could’ve predicted, Covid-19, has suddenly sent the unemployment rate to 14.7%. By having a money making side project or hobby, you’ll be able to better weather economic downturns by having a second source of income. Plus, you’ll have something to do all day besides watching Netflix and applying for jobs. This side project could become a new business, or a new career. Plus, you probably already have a hobby you can monetize, you just don’t realize it yet.

At a minimum, once you develop a healthy emergency fund (to be able to weather events like these), you should be investing your extra, non-emergency money in the financial markets in order to allow your money to work for you. It sounds like something rich people do, but it’s pretty straight forward, and tools like M1 Finance are making it easier than ever to create a professional portfolio without it being or paying a professional.

Diversifying your income streams enables you to be better prepared for events like recessions that usually hit W2 income the hardest.

Treat Your Time Like an Investment

Crazy, right? The idea that time is money – or at least a scarce resource. We talked about diversifying your income streams, but if you’re spending 72 hours a week on your W2 job, how are you going to have time to devote to other projects?

While I spend plenty of time screwing around, watching reruns of Community, and playing video games, I still make sure to spend time developing skills (writing, internet marketing, etc.) which I can apply in my current or future role.

That Means Relationships, Too

Yes, you should diversify your relationships too. This doesn’t mean cheat on your partner – it means that you should have multiple people who you can go to for advice and to build perspective. If all the people you talk to on a weekly basis think like you and share the same worldview, how do you expect to get any novel advice or perspective? If there’s only one person you feel like you can confide in, what happens when that person isn’t available? If you have an unfortunate falling out, who else is going to be there for you to confide in?

Relationships are one of the most important parts about being human- we’re a social species, after all, but I think it’s important to reflect on your relationships and decide which ones are positive, which ones you feel obligated to maintain, and which ones are dragging you down. I’m a firm believer that you’re the sum of the five people you spend the most time with – you owe it to yourself to make sure those five people are making you better.

What about Investing?

Oh yeah, about that. I could never write it better than Ray Dalio did here. The data doesn’t lie: a diversified portfolio with re-balancing beats investing in a single asset class almost every time, with significantly less risk. The logic is self evident – even if the odds are the same, would you rather bet your life savings on one die roll where you have to roll a 3 or higher? That’s 60% odds, pretty good, but a lot of people would likely say no: that’s too much risk. What about betting your life savings over 100 rolls of the dice? You’d have to really not understand math to not take that bet.

Give Yourself as Many Rolls as Possible

Diversification is a powerful principle because it derisks while providing more avenues for success. So if I’m a company and I’m trying to fill two positions, should I hire two people that resemble each other as closely as possible, or should I try to hire people that share different perspectives and backgrounds? Obviously you should make sure that they have the right skills and experience to succeed in the role, but all else being equal, it seems obvious that you should diversify your talent, the same way that you’d diversify your investments.

Similarly, if you needed advice, would you seek out two people who you’d expect to give you very similar opinions, or would you look for two people who would provide you differing perspectives?

From where I see it, diversification is an easy choice – in your investments, in your career, and in your life.

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