I am a big fan of diversification.
That doesn't just mean owning a lot of companies however.
It means spreading the risk.
You need to understand your risk profile, by analysing your assets, income, profile.
For most of us who weren't born with a silver spoon, our biggest asset is the ability to earn income. Where you earn that income, in what industry, and how you allocate any savings really matters.
For example, someone who owns a portfolio that's heavy on energy stocks, who works and lives in Houston, and works at a company in the energy sector is heavily concentrated on Energy.
This person risks enduring a lost decade like 2015 - 2025, where they are at a high risk of losing their primary source of income - their job.
All the while their investments do not do as well, plus their home may lose value as well.
Someone who works and lives in Silicon Valley, owns a portfolio that is tech heavy, and works at a technology company is heavily concentrated on Technology.
This person risks enduring a lost decade like 2000 - 2010, where they lose their primary source of income - their job.
Their investments also lose value at the same time, and probably their home value declines too.
Someone who works and lives in New York, who owns a portfolio that is heavily weighted towards financials, and works in the financial sector, is heavily concentrated on Financials.
This person risks enduring a financial crisis, like the one we saw in 2007 - 2009, which led to layoffs, share prices collapsing etc. You do not want to be heavily invested on the industry that generates your income.
You want to have some diversification in case things go wrong. Insurance is great to have when you really need it.
If you do not need it, the cost of insurance is really not that high in the grand scheme of things if everything goes right for you.
Of course, there is a trade-off involved.
For example, if you go heavy on technology, you may end up really obscenely rich. Think stock options, bonuses, RSUs. Like those lucky employees of Nvidia. Winning the employment lottery must feel great, and must be life changing. However, the chances of winning the lottery as very slim, at best. It's good to be lucky, though it is far more likely that you are not. Hence, it may make a lot of sense to allocate a large portion of your money away from the sector that employs you, and invest it elsewhere.
If you went heavy on energy in the 1990s/early 2000s, you ended up doing very well, as your energy investments outperformed the market and you didn't suffer through the lost decade of early 2000s. I personally was a beneficiary of the energy boom, as this was one of the few sectors hiring after the Global Financial Crisis. It is good to be lucky, though it is far more likely that you are not. Hence, it may make a lot of sense to allocate a large portion of your money away from the sector that employs you, and invest it elsewhere.
In another example, if you went heavy on the financials in the 1990s and early 2000s, you may have made a ton of money as well. The Financial Sector can pay really well if you are good at your job, and your company does well. Think bonuses, stock, etc. It is good to be lucky, though it is far more likely that you are not. Hence, it may make a lot of sense to allocate a large portion of your money away from the sector that employs you, and invest it elsewhere.
What is the point of this post?
You need to think about your whole financial picture, and allocate funds accordingly, in order to spread the risk
You need to think about risks and rewards related to income and assets
Spreading the risk ensures that you can weather the storms that life throws at you
Those include layoffs, recessions, unemployment, health issues, family problems, retirement/education etc...
In order to take full advantage of the long-term compounding of equities, you need to be able to survive first, and then shovel as much capital as possible into investments to reach the desired FI crossover point.
