Tattoo Today This 1 Risk Management Concept
Day 22. Setting up for riskier investments
Each week, I share my university class notes with my paid subscribers. We are discussing investments, and I wanted to share with you the contents of a slide my students will see tomorrow.
Wealth Diversification is a more important concept than investment diversficiation
Diversifying the amount of your savings across a number of financial assets is a must. Mutual funds and exchange-traded funds do that.
But, remember, you have other contributions to your wealth.
Human capital - your ability and interest to work
Real assets already owned, such as a home, collectibles, antiques, and jewelry
“Among many baskets that determine household wealth,
an investment basket is just one type.”
Each basket, indeed each component of each basket, is subject to risk, and rarely, each component’s risk is perfectly correlated with every other component.
Takeaway: if your future portends a robust human capital in your future, any investments in financial assets may be more diversified than at first glance
I found it interesting that this post looked at assets beyond the typical wealth determinants of human capital, cash, and investments and at physical assets as a part of diversification. Physical assets are a great way to maintain wealth because, more often than not, real assets will hold their value or grow in the long term.
I think that many people underestimate the importance of human capital on overall household wealth and financial success due to the fact that many don’t realize how many factors there are that contribute to it. Things such as ability to work, interest in working, and earning potential play a much greater part (especially compared to investment diversity) than people realize.