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  • Writer's pictureJohn Krehbiel

The Power of Concentration and Diversification

Concentration makes you rich, …

You’ve probably heard the advice, “choose a job you love, because you’ll never work a day in your life!” Concentrating on a job you enjoy is also the path to financial success IF you choose a career where you are paid based on expertise. Here’s the causation train:

If your job is something you really enjoy, you’ll give it more of your time and energy,

If you give it more of your time and energy, you’ll get better at it.

If you get better at it, you’ll be more valuable to your customers and therefore your company,

If you’re more valuable to your company, you will get paid more!

Repeat this every week for a 30 or 40 year career, and the power of compound interest (applied to your work effort) will yield exponential results.

….Diversification keeps you rich!

Concentration in investing, though, is risky. Individual stocks are much more volatile than a diversified portfolio of many stocks. Just such a “diversified portfolio” can be purchased at very low cost using index mutual funds or ETFs (Exchange Traded Fund). I sometimes compare investing in the stock market to casino gambling. Owning individual stocks is like betting on a single number in roulette; you could have a big payoff if you win, but you also have a much greater chance of losing. Buying and holding a market index fund is like betting on both red and black at the same time, with a positive (but smaller) expected payoff over time.

Note: One HUGE difference between casino gambling and the stock market is that over long periods of time investors have historically made >8% per year in the stock market, compared to -1 to -5% on average that is the casino’s “take” out of your gambled money.

Bottom Line: The saying among financial advisors is, “Concentration makes you rich, diversification keeps you rich.” I believe the best things to concentrate on are your family and your job skills, and then invest the riches that result into a diversified portfolio.

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