Don't be a missing billionaire: Know how to diversify investments to grow your money Isnt that just a way of saying that they should have diversified? Yes, of course, it is
Most of us who have been reading about investing for a few years have come across a hedge fund, Long-Term Capital Management (LTCM). We now know this fund as a cautionary tale on how supposedly smart investors can lose enough money to be wiped out, personally and professionally. LTCM was established in 1994 by John Meriwether, a former vice-chairman and bond trading head at Salomon Brothers. Its board boasted esteemed members like Myron Scholes and Robert C. Merton, who would receive the Nobel Prize in Economics in 1997 for creating the Black-Scholes option pricing model.Initially, LTCM achieved amazing success, with post-fee annualised returns of 21%, 43%, Band 41% in its first three years, respectively. However, in 1998, it made a staggering loss of $4.6 billion in just under four months, primarily due to its high-leverage Asian and Russian financial crises. This necessitated the intervention of the US Federal Reserve, which organised a bailout package of around $3.6 billion to avert a wider financial meltdown.
One of LTCM’s bond traders, Victor Haghani, has written a book, The Missing Billionaires. The book’s central argument is rather provocative. It says that if the wealthiest families had spent a portion of their wealth wisely, paid their taxes, invested in equities, and transferred their assets to the subsequent generations over the past hundred years, today we would have seen tens of thousands of billionaires inheriting age-old fortunes. Yet, the enigma of The Missing Billionaires is the absence of such heirs in contemporary wealth lists. While there are several reasons for this, Haghani and his co-author, James White, claim that this is because of a critical error relevant to every investor: improper risk assessment. The book says that many of these families didn’t necessarily make poor investment choices, but misjudged the scale of their investments.
This idea sounds like an apology for Haghani’s own missing billion. As he has confessed in the book, he lost a sum in ‘nine figures’ in the LTCM collapse, which was his own doing. So, if he lost a few hundred million dollars 25 years ago, he must be missing more than a billion dollars now. While I agree that everyone should invest in a better manner, I’m more than a little sceptical about ‘misjudging scale’, which is just a roundabout way of saying that people invested too much in a few assets. Isn’t that just a way of saying that they should have diversified? Yes, of course, it is.
That’s all there is to it. People should not only diversify their investments in various assets, but also the amount they invest in each type of instrument, and they, or at least many of them, will gradually generate wealth and be able to keep it. All you need to do is not have too much exposure to one investment, or even one type of investment, and you will never face a situation where you lose a major portion of your net worth. In fact, I’d like to take the idea further. As I wrote in this column a long time ago, you diversify your investments and your investments diversify you. What this means is that your investments can help you diversify your career and life.
During Covid-19, many people found their careers stagnating or shaky. They found it hard to switch to another industry that had better prospects. This is because after a decade or two of working in one type of job, they had become good at it, but had also been imprisoned by it. The people who manage to accumulate good savings during such a crisis can weather it and move their career in a better direction. In a sense, their investments provide them with the ability to diversify their lives. Haghani’s missing billionaires were not able to do this, but people with far less money can do so if they learn to stick to this basic principle.
The Author is CEO, VALUE RESEARCH
Connect with Experts - Wealth creation made easy(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
