How To Diversify a Field Of Grain

Predict Or Protect was an idea I raised in a recent post.  That post dealt with insurance.  This one deals with investments and the idea of getting at least the yield you need. 

The investment analogy arose from a marketing article at Huffington Post.  For purposes of portfolio management, the insight is interesting.

Peasants in the Middle Ages used to purposefully create deep ridges and furrows in their arable land. This meant that if there was a particularly wet year the crops on the ridges survived whilst if there was a drought the crops in the furrows prospered.

They did this because they were loss averse: they knew that whilst a surplus of food was favourable, a lack of food was fatal. In fact this attitude to risk has been a facet of human development for so long that evolutionary psychologists think that we’re hard wired to be loss averse.

A balanced portfolio in a field.

I suppose it is theoretically possible that both furrows and ridges prospered sometimes and also possible that neither did, but those would be the outliers.  Most of us run our lives on the fat part of the Bell Curve and use up reserves in the bad years and put things in the reserve when fortune is particularly kind.

Being fully invested at all times in one asset class would be like the peasants using flat fields only and when they enjoyed a bumper crop, acquiring more flat fields.  It is not if they will starve, just when.

Diversity is defense and defense wins well enough to get along.  It is sadly not very interesting.  While we are all loss averse, it is not many of us who enjoy the defense part.  A 5-year certificate of deposit is uninteresting.  Guaranteed maximum return.  No decisions in the interim.  Tax reporting is easy and they are trivial to arrange.  Boring!  But every once in a while you hug them.  Like late 2008 and early 2009.

The question you must ask yourself, as I am sure did the peasants, is enough good enough.  Is the achievable yield that gets me what I want the rate I should aim for or should I try to get into the Guiness book of world records for best performing portfolio.

Recall how the peasants decided, “They did this because they were loss averse: they knew that whilst a surplus of food was favourable, a lack of food was fatal.”  Extra meant little and too little was tragic. 

They created a Goldilocks yield that was “just right” and so should you.

Big wins have little value.  Craig McCaw claims you can live as well on $1 billion as you can on 10.  Likely true, and on a more normal scale, extra money provides most of us with only refinements on our lifestyle.

Big losses on the other hand are felt and are much more than a little refinement.

When you decide to save for retirement, estimate the capital need and the savings requirement, but pay careful attention to the rate of return.  Look for the just right yield first.  Taxation advantages,  investment expertise and management costs can provide room for slight improvements.  Start with achievable and then work the details.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

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