The Necessity Of Risk And The Importance Of Diversification

I read an article a while back that really piqued my interest. It's a U.S.-based article, but the principle seems to be universal. In it there's a quote that really made me think.
"Billionaires do not become billionaires by getting into a diversified mutual fund or investing in an ETF or investing in the S&P Index Fund," Miller tells The Daily Ticker. "You get rich by building equity in a very concentrated position that is typically one big company."
Of course, I'm not shooting to become a billionaire. I just want to be financially independent; to be able to spend my time more in accordance to my interests rather than according my employer's interests. I guess I'd probably need to be a millionaire for that, though I'm not really itching to be a millionaire either - at least not for the money.

But to take such a big step in my life, I guess I can't just play it safe. I would really need to step out of my comfort zone and roll the dice from time to time. Without taking any risks, I won't achieve anything worth while.

But the necessity of risk doesn't mean that being careful is not an option, or even just a secondary concern. On the contrary, the necessity of taking risks makes it more necessary to be careful. The last thing I would want is to go "all in" and lose.

So I need to have an adequate emergency fund and live below my means.

And despite what the article said, it wouldn't be prudent to forgo investing in mutual funds, UITFs, ETFs or Index Funds altogether. On the contrary I believe its important to maintain a diversified set of investments.

This way, I have a viable "safety net" in the unfortunate event that my primary investment fails.

But if I want a big change, I'd have to take bigger steps - get out of my comfort zone. I'd have to either start my own business, invest in a start-up that has real potential, or take some other time-consuming, challenging but very rewarding endeavor (after doing my due diligence, of course).


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2 comments:

  1. I think those that go "all in" already have the necessary financial education to back up their educated guess (like Warren Buffet). If newbies such as ourselves act the same way, we would really be gambling, while the Warren Buffets of the financial would be taking a calculated risk. Big difference right there.

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  2. "Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth." - Ecclesiastes 11:2

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