Diversification
Winter 2025
This 4th issue completes one full year of financial literacy newsletters and digital asset updates. Thank you for your continued support!
Having previously covered the concepts of mindful consumption and budgeting, it only makes sense to discuss proper investing and diversification. So far, every crypto gift to the children in our lives has seen enormous gains. So why not throw it all into Bitcoin or Ethereum? Maybe you missed the memo, but the enormous growth in the digital asset space was a great outcome…but never the end goal of this exercise.
UNCERTAINTY
There is an old adage to never put all your eggs in one basket. This is true in chicken husbandry as well as investing. Every investible asset comes with an associated risk. The US dollar is subject to inflation. Real estate value can fluctuate overnight. A particular company or even an entire sector can lose its competitive advantage. Municipalities offering bonds can default. Digital assets face a looming threat of quantum computing.
Diversification seems like common sense, but why is it true? Why waste your time with those 2nd or 3rd choices? Why shouldn’t you put it all into the highest potential investment and capture all the gains? First of all, it’s like putting all your chips on red at the roulette table…you just can’t know who will be the winner. We don’t know either. Secondly, you will need to capture your gains at various points in your lifetime. However, asset values can fluctuate significantly, and potentially be in a long term dip when you need to cash out most.
IT’S STILL MATH
Diversification is common sense, yet it also has a mathematical foundation. Due to negative correlation of asset values, the greatest potential return given the risk (i.e. volatility) is achieved by a collection of assets rather than a single entity. How many different assets?
Classic theory suggests ~30 non-correlated assets. Why non-correlated? Imagine if you bought 2 automotive stocks. Industry changes would affect them both similarly and you would not receive the benefits of negative correlation. For those who fell asleep in Finance 301, refresh yourself on diversification as a core principle of modern portfolio theory.
HOW WE DO IT
Anh is a fan of Vanguard’s S&P 500 ETF. It’s a classic basket of the biggest 500 companies in the US by market capitalization. Does he worry about international exposure? Sure, but since people in the farthest reaches of the globe are using Google on their Apple iPhones…he’s getting plenty of international exposure in today’s biggest companies. When he’s concerned about the market getting too frothy, he follows Robert Shiller’s CAPE ratio as a gut check. In addition to US equities, he is diversified into municipal bonds, real estate and digital assets.
Jon loves diversified commercial and residential real estate holdings across multiple states and climate zones, but is also a huge fan of Charles Schwab’s brokerage platform for picking his own assets, like Bitcoin Miners, Airlines, BTC and ETH ETFs, Schwab’s Money Market fund, and also the Vanguard 500 index fund. When Jon is concerned about the direction of the market, he likes to study the Standard and Poor’s 500 on the monthly and yearly timeframe, as well as Bitcoin’s market cycles in relation to their relative oversold or overbought valuations.
SUMMARY
We’re here to expose the next generation to financial literacy. While digital assets have seen enormous gains and may spark interest into asset ownership, diversification is still a cornerstone of investing. Every investible asset comes with risk and potential return whether it’s the US dollar or a celebrity crypto coin. Even when investing in established assets, diversify your portfolio to optimize risk.
Jon & Anh @MyUncle_Satoshi
