3022: The Myth Of Diversification And Why It Means It’s Okay To Take Chances by Kevin of Financial Panther

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[00:00:58] That's readthejoe.com slash subscribe dash swap. Level up your money game. Subscribe to The Average Joe now. This is Optimal Finance Daily, the myth of diversification and why it means it's okay to take chances by Kevin of FinancialPanther.com. A common piece of wisdom is to never put all of your eggs in one basket. This makes a lot of sense. None of us know what's going to happen.

[00:01:28] We'll be right back. We'll be right back. If one thing doesn't work out, maybe something else might. And you won't lose everything either. It's why most financial experts, myself included, recommend investing in passively managed index funds rather than individual stock picking or actively timing the market.

[00:01:51] Instead of going all in on a single stock, you diversify by spreading out your investments over thousands of different stocks. To use an analogy, you don't want to push in all of your chips at once. Spread it out so you don't go bust. Diversification is such a normal part of investing that few people argue against it. And yet, in the real world, none of us do this. We all make decisions where we put everything on the line.

[00:02:20] The crazy thing, though, is few of us realize this. We go to school, we start careers, and we do all of this without realizing how much we've put into this one thing or how risky that seemingly should be. I quit my job two years ago. It was a huge leap for me. I'd spent five years practicing as a lawyer, and law was the only career I'd ever had. I definitely never tried to earn money on my own.

[00:02:47] But when you put this leap into the context of the other leaps I've taken in life, it's not as big of a leap as I thought it was. I took a big leap when I went to law school, giving up three years of my life and hundreds of thousands of dollars in debt and earnings over those years. In the context of that, quitting my job to try and make a living as a blogger and side hustler really doesn't seem as big of a deal. We're all taking huge chances with our lives.

[00:03:16] When you start to realize it, it can be scary, but it can also be freeing. None of us diversify. We all go all in on something. A few years ago, my wife made a big decision. She decided to purchase a multi-office practice straight out of her residency. It was an extremely expensive decision and one that I initially viewed as too risky.

[00:03:41] After years of reading personal finance blogs and seeing people grind their way towards financial independence, that's what I thought the right path was. Work at a job, get your paycheck, and grind it out. But when you really think about it, it wasn't that crazy of a decision. My wife had already spent seven years of her post-college life pursuing her career.

[00:04:04] She'd spent over $300,000 and more than 20% of her life studying to do this one thing as her job. And when you add in the opportunity cost of all of her schooling, it easily costs her close to a million dollars to pursue this one career path. She's been all in on one thing for a long time. Was it really that risky to keep pushing her chips in? My own decision to go to law school carried a similar risk.

[00:04:33] I didn't diversify. I went all in, giving up three years of my life and going $87,000 into debt to take a shot at this one very specific career path. And while I did well with it, it wasn't a guarantee by any means. It took me a long time to take a chance on myself, even after years of finding myself unhappy with the work I was doing. I was scared to quit my job because I was told my whole life that a job was the safe thing to do.

[00:05:03] I couldn't put all my chips into something else. It was too risky. But is it really? Even if you don't realize it, you probably aren't actually diversifying when it comes to your life. Most of your income probably comes from one source. You probably spent a lot of time and money to get that one job too. When you add up your years of schooling, how much it cost, and what you gave up to get it,

[00:05:30] many of us probably spend hundreds of thousands of dollars and years of our life all to go after one thing. When you realize this, it becomes much easier to bet on yourself and take more chances. Realize that most decisions aren't life-ruining. One thing I've noticed about people, myself included, is that most of our decisions seem to be made based on fear. We do things because they're safe, or they allow us to fit in,

[00:05:59] or because they're the path of least resistance. The biggest realization I've had in the past few years is about the ramifications of our decisions. Most decisions, it turns out, aren't life-ruining. It's hard to think this way when you're someone that's driven and that's been pushed to succeed. The choices I had to make growing up and as a young adult all made me believe that our decisions are incredibly important. If you make the wrong choice or do the wrong thing,

[00:06:28] your life is over. That's just not how things work though. The worst case scenarios that we think about rarely happen, and even the worst case scenarios usually aren't as bad as we think they are. When I quit my job, the worst thing that could happen was I would fail and run out of money. If that happened, I could probably get a job again. When my wife bought her practice, the worst case scenario is that she'd fail and go bankrupt. Worst case scenario, she'd have to start over and get herself a job.

[00:06:58] Our decisions do matter, but they aren't one-way tracks that you can't turn around on or move to another path. And when the worst does happen, it's probably not as bad as you imagine. It's okay to try. It can be scary going all in on some venture that isn't what everyone else is doing. But when you realize that almost everyone goes all in on something, including you, it can be freeing.

[00:07:26] I'm still governed by fear, no doubt about it. But I also know that even when I was in my safe career, it wasn't necessarily safe. I put it all in the line to do that one thing. I could have failed badly, but people praised me for making the smart decision of going to law school because that's what people tell you to do if you want to be successful. No one tells you to quit your job and try to make money on your own online. The way I see it, if you're going to put everything on the line anyway,

[00:07:56] you might as well put it all on the line for something you really want. You just listened to the post titled, The Myth of Diversification and why it means it's okay to take chances. By Kevin of FinancialPanther.com You sign up for something, forget about it after the trial period ends, then you're charged month after month after month. The subscriptions are there, but you're not using them.

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[00:09:20] I thought Kevin made some great points in this article, and I really love the overarching optimism. While it may seem risky to put all your eggs in one basket, there are plenty of scenarios where this works out just fine. For example, I live in one home. I'm all in on this house. I have one romantic partner with all my eggs in that one basket. If those two things went away tomorrow, that would certainly be challenging. But I've been through that before.

[00:09:50] I'm sure all of us have been through breakups, or our landlord raises our rent and we're forced to move. While we all may have different tolerances for risk, this simple act of being alive, of just existing, is incredibly risky. At any moment, things could go wrong, or circumstances may change, or life could throw us a curveball we least expect. But if we look at life through the lens of trying to minimize all risks, we might never leave our homes.

[00:10:20] And is that really living? This article reminded me that so much of life is uncertain. But if we're able to embrace that uncertainty with a level of trust in ourselves that we're smart enough to figure it out, we're better positioned to live fulfilling lives. To help ease my anxieties over potentially choosing the wrong path, I tell myself it's not possible to make the wrong choice. Because even if I choose a direction that's challenging,

[00:10:50] within that is an opportunity to learn and grow. How would we live life differently if our greatest fear was the pain of unrealized potential, rather than the fear of what could go wrong? And that should do it for today. Have a happy rest of your day, and I'll see you on the Thursday show tomorrow, where your optimal life awaits.