Over the years of being involved with financial planning and the investment of clients’ funds, we have seen the diverse ways people think about investing. We have noticed that certain groups of people prefer similar ways of investing: for example, farmers tend to reinvest all their profits in their farming operations; and property developers reinvest all their money in property. There is method in this madness, because one of the most important wealth-creating truths is that you should stick to what you know best. There is, however, another important aspect to investment, namely that the rules for creating wealth differ from the rules for preserving wealth. When we ask these clients why they would not consider investing in something other than their main way of making money, the reply is often, “Can you guarantee me a higher return than what I can get from my farming or property development?” Of course the answer is no, we cannot guarantee that.
Our reasoning regarding investment, however, does not take into account only the returns generated by a specific investment, but also the risk involved in generating those returns. Personally, I have to confess that I stand in awe of people who can so single-mindedly pursue their passion; whether farming, property development, opening up a restaurant or whatever; that they disregard all thought of its possibly ending in failure. They have total trust in what they are doing, these true entrepreneurs. It is also because of these risk-takers that civilization always advances at such a rapid pace. But, it is in that same rapid advancement that the risk lies.
It is so that many super successful, single-minded people believe that their current winning recipe will remain a winner forever, but their belief may turn out to have been misplaced. All because of how our way of life is repeatedly being changed by the astronomical innovations taking place. We all know of businesses that have been disrupted over the past decade owing to the way people now interact online. Just the other day, for example, the gigantic shopping mall was the way to go. But then Amazon happened and its little friend COVID-19 came along and now shopping is often done online!
But that has not been the only disrupter. Think about all the industries driven by oil. In 2008 the price of oil was $140 a barrel and it was rumoured that the world supply was running out, but now the price is $40 a barrel and countries are changing to renewable energy.
When we advise clients to invest outside their expertise, it is not because we believe we can generate better returns. It is because we understand that risk comes in many forms. It lies in the political and economic situation of the country you depend on for income; it lies in the innovation happening in your specific industry; it lies in the preferences of your client base; it even lies in the things you do not even know you don’t know. So, from our point of view, one of the best ways to address these risks is always to diversify some of your profits into assets that will benefit when the tide turns against you.
