Portfolio Diversification vs Concentration-Part 2
Last month, we started the conversation around this perennial debate. If you have not read that article, click here to catch up. This is a 3 part series that will expound on this concept and challenge us to dare to think differently when charting our investment journey. Towards the end of that discussion we presented the scenario of Steve who is trying to decide an appropriate strategy to grow wealth (Note: Not become rich).
Steve wants to commit Ksh 45,000 every month towards his investment portfolio. The options available to him are Stock Market, Sacco Contribution, Sacco Share Capital, Land, Money Market, Treasury Bonds, Insurance policies, and Forex. For most risk adverse readers they would pick a combination of the above that they deem safe and divide the amount of money among those choices. This would provide them with a safe and well diversified portfolio.
When I posed the question in the last article, I hoped that many would start figuring out what combination works best based on their experience. If you fell into that trap, don’t feel bad. True wealth starts by you deciding and committing down on the following:
- How long of a journey you want to endure
- How much suffering you are willing to endure to get your goal
- What does success look for you.
In the rest of this part of the series I want us to expound on the above matters.
How long is your investment journey?
If you are older than 25, I want to encourage you to write down 10 goals that you would like to achieve in the next 5 years and 10 years entailing personal and financial goals. I am currently in my year 4 of my first 5 year plan and I can attest the power of writing those goals down. I will share an article later on how I arrived at my goals. The reason I encourage you to use the 5 and 10 year benchmark is because it gives you enough time to make decisions that have enough time to grow and for you to realise the impact.
How much suffering?
Most people don’t think of building wealth as one that requires you to endure some form of suffering. Be it denying yourself certain pleasures of life in the pursuit of your goals to actually choosing to put yourself in discomfort in the short term to attain your goal. Be aware of the sacrifices and embrace them because, if you are on a journey to grow wealth and are not making any sacrifices my friend……
What does success look?
Internalising the face of success is a critical mix to building wealth. This is important because for most people, this is usually a vague description such as I want to make enough so that I don’t worry about money or I want to be rich. The challenge with describing success in this way is that you do not have a guiding star that you can reference throughout the journey. One of my best face of success that drove me for the first year was this:
I wanted to generate enough interest income from Sacco and Money market that covered all our household expenses (Electricity, Water, DSTV, Home Fibre, and monthly shopping
What this did is that every month I would capture in detail those expenses and compare them against how the money market and Sacco were performing. Guess what that did for me, I quickly grew my Sacco and money market portfolio until this was accomplished. A clear concise goal allowed me to remove any distractions in my investment journey.
Your homework in this series is to sit down, ponder on the above questions posed in your investment journey. Do not rush through it, I want you to really interrogate yourself and at the end of that session draft a first version of your 5 and 10 year plan. Note the first draft is not going to be perfect so don’t even try to. True growth comes as you iterate that draft as you will start to see things in a different light.
In the next chapter of this series, I will finally delve into some numbers on diversification and concentration strategies.
Have a productive weekend!
#HappyInvesting
