As the story goes, ancient Chinese merchants would ship their products down the river to the next town as part of normal trade. Farmers would ship their produce and livestock as well. The problem, however, was that accidents were waiting to happen and could strike any ship at any time. An entire season's harvest could be ruined all at once. Merchants became wise and split their goods between 10 ships. This obviously increased the chances that a ship carrying some of their goods could sink, or be stolen, or ruined somehow. But, the rest of the ships would make it, and the small loss was part of doing business in order to ensure that most of the goods reached their destination. This is insurance in it's basic form. It is also an example of diversification.
Most people have their retirement funds in stocks and bonds. Much is heard about mutual funds as the pathway for diversification. But the stock market, while divided up into different sectors, still consists of stocks. They are part of the stock universe. Some may disagree, and say that a variety of stocks is all you need. At any rate, the entire stock market can fall in the aggregate. Electronic trading can accelerate this, as selling spills over from one sector to another. Some sectors are more stable than others, some more volatile than others. The market can get disturbed easily, and there are numerous examples of very large drops in the stock market, slow and fast, such as occurred in 1929, 1973, 1980, 1987, and 2000. Drops in the 20 - 60% range, which have occurred routinely, correspond to the sinking of 2 to 6 out of 10 boats! After the 1929 crash it took 28 years before the market recovered to its pre-crash high. In 2000, popular stocks inevitably filled the portfolio of popular mutual funds. Stock market 'gurus' led the choir in unison as they sang of the wonders of technology stocks. Fundamentals were ignored. The technology boom of the 1990s, cheered on by stock analysts, ended with wild stock overvaluations and subsequent 80% collapse, especially in the NASDAQ. The ridicule is still fresh in my memory as a few of us had the nerve to warn others of the frothiness in the stock market, and pulled out to greener, safer pastures.
However, let's look at "Big 7" diversification principle. The stock market is one area for your retirement funds or nest egg. This means we need at least 6 more. Ecclesiastes 11:2, written by King Solomon thousands of years ago, says "Divide your wealth into 7 (or 8) portions, because you do not know what risks lie ahead." The verse carries the meaning that we should divide our nest egg into many portions because we do not know what will happen in the world. That would be nice if we could tell the future! Perhaps Warren Buffet is an exception, and is qualified to mock those who diversify as ignorant, but time will tell. Even if we diligently read every annual report, and understood them, there is still a significant amount of information that the individual investor does not have access to, nor is he likely to get it in a timely manner to act. Many markets are interconnected and a crash in one can cascade into others as seen in 1929. At that time the drop in the stock market caused a both bank closures and a real estate price collapse, amid unemployment over 40%. Aside from stocks, 5 other areas to invest in, after due diligence of study, include bonds, real estate, home business, commodities, and insurance. The 7th investment is a radical investment area to consider, which is tithing.
Why tithing? If we cannot take anything with us, it would be like having all ships sink with nothing to show for our hard work. This area of investment takes a step of faith in reconciling with God, but in the bible, Malachi says in Malachi 3:10b, "If you do, says the Lord Almighty, I will open the windows of heaven for you. I will pour out a blessing so great that you won't have enough room to take it in! Try it! Let me prove it to you!" This would indicate that God Himself knows we are programmed to love a profit, and challenges us to invest in Him. That is one big promise too. Well, the proverbial Hearst never pulled the proverbial U-Haul out of this world, delivering the belongings of the deceased to the next location, as King Tut found out. So this promised wealth would have to be durable and transportable out of this world, a promise only God could make good on.
Best wishes for your prosperity.
About Richard Kimura:
Rich Kimura is a project engineering manager, freelance writer, married father of 4, chemical engineer, and entrepreneur. He has authored numerous technical papers, has 1 patent and 2 patents-pending, and 24 years experience in the nuclear and chemical industries. Rich started 6 micro-businesses, received training by Crown Financial, and teaches on both subjects. To see more personal experiences on finances, relationships, spirituality, and other topics, visit Cirrovista at http://www.cirrovista.com