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  • Writer's pictureBrett Bowman

A CFO's Perspective on Diversification

From my humble investment beginnings of a passbook savings account in middle school, my investment journey took me through Certificates of Deposits in high school, IRAs in college, and many direct investments in companies, real estate, and other financial instruments along the way. I have learned to value many of these different forms of investments. As I have matured in this investing journey, I have come to value diversification as arguably the most important component of investing to reach your long-range financial goals while minimizing risk. We have all heard stories of the deal we missed that blew up and everyone made tons of money but we’ve also heard of those opportunities where we wipe the sweat from our foreheads and were thankful that we were just too busy to invest in the deal that went bust. There really are no guaranteed shortcuts to investing wisely.

Diversification brings to mind one impressionable moment where I recall talking with my retired father almost 20 years ago that reiterated this time tested investment principle. Dad had worked for Procter & Gamble for 37 years and the company had treated he and our family well and prepared him well for a comfortable retirement. I remember the wonderful gift baskets he received every Christmas where we kids fought for first rights to the goodies. This particular afternoon Dad was in a somber state after a significant part of his wealth evaporated overnight. He was heavily concentrated in P&G stock which dropped over 30% in value overnight. Could he still make it? Would it recover? Can he stay retired? These were the questions he was asking himself. It took over 2 years to recover to the preceding day’s price and for someone on a fixed income, it took a toll on his retirement. He would never recover emotionally from this vaporization of value driven from a concentration in a single investment position.

I encourage my family and friends to diversify in the types of investments, industries, and the risk profiles of the opportunities. Real Estate is a great alternative to traditional stocks and bonds and offers another opportunity to diversify your investment portfolio in a tangible asset. I have even encouraged real estate investments through an IRA. There are numerous trust companies that can facilitate real estate and other investment opportunities through trust vehicles using your IRA funds. This is a great way to capitalize on tax advantaged growth through funds that already have limited liquidity.

Do yourself a favor. Make an assessment of your own investing portfolio and determine if you need to further diversify your portfolio … you will not be sorry.

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