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How to Preserve Wealth – Diversification

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Wealth DiversificationA very important part of financial planningis wealth management.  For many, right now you are doing everything you can just to try and make it month to month and that managing wealth would be easy if you just had the wealth.  Well surprisingly enough, earning money is just half of it.  The other crucial half is knowing what to do with it and preserve it.

Throughout this site there are many resources about tools and vehicles that can help you in managing your money.  It is important to become educated about what is available and how different investment vehicles work.  Whatever decision you may make, always remember the important principle of diversification.

There are many that claim “if I only had $2 million, I would be set for the rest of my life.”  The idea may seem enticing, however, you may be surprised how quickly $2 million turns ito $0.  There are many examples of rags to riches story in the US.  I mean it is the American Dream right?  Well, for every rags to riches story there are at least two riches to rag story.  Unfortunately, two major traits that lacks among most Americans are disciplined spending habits and wise money management practices.  In fact, there are many examples of rags to riches stories only to return to rags again.  However, wise decisions can help safeguard and preserve your wealth throughout the remainder of your life.

Diversification is an essential principle to wealth management.  I can’t even count how many people I have known personally who have experienced extremely great successful times only to see everything they earned and more taken a way from them.  Why?  Because they were not diversified.

It is only natural that as we come across practices that bring great financial success to remain focused solely on those practices.  However, this is a risky game to play and, far too many times, ends in the person having nothing.  Why did so many people become homeless when the stock market crashed during The Great Depression?  For most, it was because most of their money was in it.  What many people do not know, was that there were many people who did well, even better, during those years, because they executed strong financial planning practices.

So how do you protect yourself from wealth decay?  First of all, if you are in a trade or occupation that experiences cyclical  economies (most do) then it is important to plan for it.  Real estate is a prime example of this.  From 2003-2007, real estate was on fire.  Some houses were doubling in just a years time.  At the time, it seemed like anybody and everybody was making money off of any type of real estate.  However, towards the end of 2007, real estate was hit hard with a recession, which tanked the prices.  As a result, much of the gains that were made during 2003-2007, were taken back within three years.

There were some people who planned an exit strategy.  Anytime you embark on an profitable business, you should always construct an exit strategy before hand.  It is much like going to an auction.  Any experienced auction participant knows that you must make a final decision of your maximum price before the auction begins.  By doing this, you guard against “impulse buying” that becomes very evident in an auction environment.  I have seen people pay thousands of dollars more than they wanted to for something only because they were caught up in the auction…then comes buyer’s remorse.

This practice is also applicable to personal finance.  Judgement can become very clouded in the midst of a very successful business venture.  In fact, greed can sometimes completely take over and convince you that things will remain this good forever.  Having an exit strategy keeps you on track.  Eventually the time will come, where you decide to cash out, make a change, or whatever is decided in your exit strategy.  Sure, you may miss out on certain opportunities in the short term, but in the long run you will be much better off.

This is where diversification comes in.  Being that the US is a cyclical economy, we find that there are a lot of ups and downs throughout history.  If you look more closely, you will also find that certain industries are much more down during some of the down times than others and vise versa on the up times.  For instance, in 2009, real estate prices were down 50%, however, tech companies were only feeling a 10-12% decline.  I am sure most would say they would have preferred the latter.  However, during the up times, real estate was growing triple the times that the tech industry was. 

The point is, it is impossible to tell which industry will thrive at what time and which one will crash.  Sure you could guess and put all your eggs into one basket, or you can diversify your funds.  Sure, you may not experience as big of gains as you would if you chose a strong growing industry at the time to invest in, but you will greatly preserve much more than most during economic contracting times.

There are many different types of investment groups and funds that can diversify your funds for you.  They will sit down with you and find out your financial goals.  From there, they will give you a proposal, showing you exactly how much they allocated into each sector, also giving you the “risk” amount of the investment.  Higher risk investments tend to yield higher returns, however, they also have a greater chance of failing.

As you continue to become successful, wealth preservation will be critical.  Continue to learn how you can diversify your funds and protect yourself against our cyclical economy.

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14 Comments »

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