(If you like video games, you might like this article)
Think of this as a character menu screen for one of your favorite characters in an RPG game.
For example:
I’m new in my career as a wealth manager. And like any other professional at that stage, I’m still developing my philosophy about my practice and how to conduct one.
It’s no secret if you have read my previous writings - I’m a pretty big nerd. More specifically, a comic book, video game, superhero/superpowers, nerd.
My children have been pulling it out for what seems like every day since they were born.
Financial advisors wield superpowers just like a superhero does, and like them, we have to train ourselves how to manage them.
Diversification is one of the first skills an advisor is trained to use.
Sometimes firms will issue brochures advising individuals looking for an advisor on what questions to ask.
I think one to ask, "how well trained are you in diversification?"
—
Diversification: Diversification is a valuable principle. Diversification is good in all aspects of life.
Let’s think about this in a different lens before I dive into my points …
When you work out at the gym, hitting a diverse set of muscles is better than doing one and doing that every day. (Believe it or not, many people don’t actually use this principle. To keep it brief, “there are a lot of folks skipping leg day.) If you don't, your body will lack symmetry - from left to right, top to bottom.
Nutrition and flavor are other areas of diversification that help because you can acquire the necessary nutrients to rebuild and maintain various aspects of your body.
See my chart below:
Squats: Legs
Various Bench: Different parts of the chest/shoulders
Deadlifts: Core/Hamstrings
Various curls: different parts of the bicep
Protein: Muscle Rebuilding
Fiber: Digestive Health
Vitamins/Minerals: Hair, Nail, Skin
Carbohydrates: Energy and cognition
Again, it’s great for all aspects of life.
Diversification in the Hands of a Financial Advisor:
Diversification is material forged in the sword and shield of wealth management.
When I use it for offense, our sword, it appears valuable in our investment process; When I use it as a shield, we are using it to protect your assets now and new ones acquired/transitioned in the future.
(The Sword …)
Investment Process:
Diversification happens at various stages of the wealth management process. Referring back to MechFi’s individual/small business owner's service blueprint, diversification exhibits its most promising properties in potential return opportunities, mitigating the risk of anyone's investment and lowering tax bills.
- Investment Opportunities: This idea is simple. It broadens the scope of the type of investments, the "what, and the “who.” A scenario for this is to be invested in a portfolio of stock/bonds and stock/bonds/real estate/ favorite commodities, cars, self, spouse, and even your best friend.
- Mitigating Risk: Not to throw another term at you, but diversification mitigates Idiosyncratic risk, or to keep it simple, a risk, or set of risks, unique to one type of investment.
A relatable but inverse scenario is what is currently happening with the Federal Reserve raising rates, which is systemic risk, or a risk that universally impacts a certain investment type. In that case, the systemic risk is higher interest rates, and higher rates impact all stocks.
Idiosyncratic = risk to one
Systemic risk = risk for many
- Lowering Taxes:
Different investment vehicles have different tax obligations. Using diversification allows you to take advantage of opportunities in risks and returns. Again, same story, diversification of investments, ideas, strategies, advisors, managers, etcetera.
Taxation is diversified the same way …
Short-, long-term, depreciation, exempt, wash sale in some cases, tax loss harvesting, exchanges, etcetera.
This saves money. You can diversify across accounts blindly, with nearly zero awareness of what you are doing, and are nearly able to yank out value.
(The Shield …)
- Diversifying Entities and Investment Location:
When I think about business entities, like a corporation/LLC, I think about force fields.
If you have ever seen Star Trek, Star Wars, The Incredibles (my son’s favorite movie), or any other futuristic fictional films, force fields are cool and protect anything inside them.
When an entity is structured and maintained correctly, it divides what is at stake, and this is traditionally seen as “Limited Liability” or the two “L’s” in “LLC.”
And how to think about what is at stake depends on whether a moment triggers liability inside a company's operation or in a business owner's personal life. If a person hurts themselves at a business owner's house, the business owner’s personal assets are at stake. The inverse is true if something happens inside their business.
(It isn’t a perfect defense, but it’s defense. Also, I'm not an attorney. Do not take this information as a form of advice.)
A million metaphors can describe an entity's function … castle walls … “a shield,”… etcetera. In the wealth management world, diversifying entities and strategically placing investments in various entities (forcefields) it’s a form of asset protection.
(Healing potions …)
- Insurance:
Everyone knows what insurance is used for, to restore one from loss in a monetary sense. I wanted to add this section to provide a more rounded newsletter. But again, diversifying insurance premiums by buying the right insurance customized to a person, or small business owner’s needs may increase the value of insurance per dollar spent on premiums.
Moreover, I wanted to mention another simple comparison to a potion in a role-playing or RPG game, I used to play when gaming was a bigger part of my life. To restore the character's health points (HP) from any damage they incurred in a battle, the player would give them a potion to restore their HP.
(Usually, turn-based)
Wealth Management and Gaming certainly crossover.
Below is a blueprint, a tool, but also a map for an investor to progress in their finances as the player does in an RPG.
