Diversification is, at its root, a response to the ancient admonition you might have learned from grandma: don’t put all of your eggs in one basket. If that basket drops they could all break, ruining your and grandma’s breakfast! This proverb can be traced back to the 17th century, and was popularized by Cervantes in Don Quixote. (Later, Mark Twain, ever the contrarian, proposed the exact opposite: “pull all your eggs in the one basket and—watch that basket!”
The wisdom of Cervantes goes nearly unquestioned today. Virtually every reputable financial firm teaches people about diversification, extolling the importance of spreading out risk. But—and this is an important but—we contend that however well intentioned, Wall Street’s version suffers from two major omissions: first, they focus solely on one’s financial instruments, and second, they can’t model the possibilities of Breakdown/Breakthrough, so they presume that we’ll be Muddling Through for the foreseeable future.
These blind spots have led investors to focus nearly all of their attention on investments made within a single zone (financial assets/global economy). A good financial advisor will assure that you are diversified within that basket, and might even offer advice on the real estate zone (tangible/ close to home) but this is far different from being offered enough baskets to fill the Resilient Investing Map. A more accurate image is to picture a bunch of small dividers (sub-categories of types stocks and bonds) placed within the basket that contains Wall Street’s financial instruments...
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