Why you don't diversify when you should

An explanation for why investors don't diversify like they should.

The other day, an associate asked me, "Why don't investors diversify when virtually every investment professional on the planet says they should?"

"I haven't a clue," I said.

Those who know me are probably in shock right now. You see, I've got an answer for everything. Not that I always know what I'm talking about; I just act as if I do. I know, it's a gift.

My wife, who is much smarter than I am, actually knows about a lot of the stuff that I so callously pull out of my ass. It drives her crazy.

Maybe that's why I do it.

Anyway, I got to thinking, why stop there? I mean, why just diversify your investments? Life is risky business. Why not diversify everything? I mean, if you have just one job, the company might go under or you might get fired. Become a consultant, like me, and work for lots of companies. Problem solved.

Have a bunch of kids. If one turns out to be an a-hole or a druggy, just write him off. There's plenty more where he came from.

Cat got hit by a car? No problem, you've got three more to rub up against you and purr.

Instead of remodeling your home, get a second one, just in case the first one burns down or your wife kicks you out.

All your PCs run on Microsoft operating systems? You're just asking for trouble.

Develop multiple personalities. That way, if you go nuts, you can just slide right into a sane personality. Then you can bring the crazy one out whenever your in-laws are in town, or when that jerk at the office yanks your chain.

Too bad we live in a monogamous society, right?

Just when this mental exercise was getting good, that's when the light bulb went on.

All that diversification introduces complexity. And humans don't like complexity. We're organisms. You know what organisms do? They organize. Our cells have boundaries. People only come in ones, for the most part. We even organize our companies into organizations.

Too much diversification and you have chaos, which organisms hate. We are creatures of habit. We're also creatures of few, rather than many. We like few. Many is a pain; it's a lot of work and organisms don't like that.

We don't diversify as much as we should because it's easier for us not to, the path of least resistance.

So, when your CEO robs the company blind and gets caught, rendering your stock and your nest egg worthless, don't freak. Just get in your car, drive home, kiss your wife, and hug your kids. They're the only ones you've got. And that's just the way it should be.

 

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