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diversification myth

The Myth Of Diversification – And Why It Means It’s Okay To Take Chances

Last Updated on September 2, 2021September 2, 2021 6 Comments
This post may contain affiliate links. Affiliate Disclosure.This post may contain affiliate links. Financial Panther has partnered with AwardWallet and CardRatings for our coverage of credit card products. Financial Panther, AwardWallet, and CardRatings may receive a commission from card issuers. Some or all of the card offers that appear on the website are from advertisers. Compensation may impact on how and where card products appear on the site. The site does not include all card companies, or all available card offers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.

A common piece of wisdom is to never put all of your eggs in one basket. This makes a lot of sense. None of us knows what the future holds, so the only way to deal with the unknown is to give ourselves a lot of outs. If one thing doesn’t work out, maybe something else might. And you won’t lose everything either. 

It’s why most financial experts (myself included) recommend investing in passively managed index funds, rather than individual stock picking or actively timing the market. Instead of going all-in on a single stock, you diversify by spreading out your investments over thousands of different stocks. To use an analogy, you don’t want to push in all of your chips at once – spread it out so you don’t go bust. 

Diversification is such a normal part of investing that few people argue against it. And yet, in the real world, none of us do this. We all make decisions where we put everything on the line. The crazy thing though is few of us realize this. We go to school, we start careers, and we do all of this without realizing how much we’ve put into this one thing or how risky that seemingly should be.

I quit my job two years ago. It was a huge leap for me. I’d spent five years practicing as a lawyer and law was the only real career I’d ever had. I’d definitely never tried to earn money on my own. But when you put this leap into the context of the other leaps I’ve taken in my life, it’s not as big a leap as I thought it was. I took a big leap when I went to law school – giving up three years of my life and hundreds of thousands of dollars in debt and earnings over those years. In the context of that, quitting my job to try making a living as a blogger and side hustler really doesn’t seem as big of a deal.

We’re all taking huge chances with our lives. When you start to realize it, it can be scary. But it can also be freeing too.

None Of Us Diversify – We All Go All-In On Something 

A few years ago, my wife made a big decision – she decided to purchase a multi-office practice straight out of her residency. It was an extremely expensive decision and one that I initially viewed as too risky. After years of reading personal finance blogs and seeing people grind their way towards financial independence, that’s what I thought the right path was. Work at a job, get your paycheck, and grind it out. 

But when you really think about it, it wasn’t that crazy of a decision. My wife had already spent 7 years of her post-college life pursuing her career. She’d spent over $300,000 and more than 20% of her life studying to do this one thing as her job. And when you add in the opportunity cost of all her schooling, it easily cost her close to a million dollars to pursue this one career path. She’s been all-in on one thing for a long time. Was it really that risky to keep pushing her chips in? 

My own decision to go to law school carried a similar risk. I didn’t diversify. I went all-in, giving up three years of my life and going $87,000 into debt to take a shot at this one very specific career path. And while I did well with it, it wasn’t a guarantee by any means.

It took me a long time to take a chance on myself even after years of finding myself unhappy with the work I was doing. I was scared to quit my job because I was told my whole life that a job was the safe thing to do. I couldn’t put all my chips into something else – it was too risky. But is it really?

Even if you don’t realize it, you probably aren’t actually diversifying when it comes to your life. Most of your income probably comes from one source. You probably spent a lot of time and money to get that one job too. When you add up your years of schooling, how much it cost, and what you gave up to get it, many of us probably spend hundreds of thousands of dollars and years of our life, all to go after one thing. 

When you realize this, it becomes much easier to bet on yourself and take more chances.

Realize That Most Decisions Aren’t Life Ruining 

One thing I’ve noticed about people – myself included – is that most of our decisions seem to be made based on fear. We do things because they’re safe, or they allow us to fit in, or because they’re the path of least resistance. 

The biggest realization I’ve had in the past few years is about the ramifications of our decisions. Most decisions, it turns out, aren’t life-ruining. 

It’s hard to think this way when you’re someone that’s driven and has been pushed to succeed. The choices I had to make growing up and as a young adult all made me believe that our decisions are incredibly important. If you make the wrong choice or do the wrong thing, your life is over. 

That’s just not how things work though. The worst-case scenarios that we think about rarely happen and even the worst-case scenarios usually aren’t as bad as we think they are. When I quit my job, the worst thing that could happen was I would fail and run out of money. If that happened, I could probably get a job again. When my wife bought her practice, the worst-case scenario was that she’d fail and go bankrupt. Worst case scenario, she’d have to start over and get herself a job.

Our decisions do matter. But they aren’t one-way tracks that you can’t turn around on or move to another path. And when the worst does happen, it’s probably not as bad as you imagine.

It’s Okay To Try 

It can be scary going all-in on some venture that isn’t what everyone else is doing. But when you realize that almost everyone goes all-in on something – and that you probably already did it – it can be freeing.

I’m still governed by fear – no doubt about it. But I also know that even when I was in my safe career, it wasn’t necessarily safe. I put it all on the line to do that one thing. I could have failed badly. But people praised me for making the smart decision of going to law school because that’s what people tell you to do if you want to be successful. No one tells you to quit your job and try to make money on your own online.

The way I see it, if you’re going to put everything on the line anyway, you might as well put it all on the line for something you really want.

This post may contain affiliate links. Financial Panther has partnered with AwardWallet and CardRatings for our coverage of credit card products. Financial Panther, AwardWallet, and CardRatings may receive a commission from card issuers. Some or all of the card offers that appear on the website are from advertisers. Compensation may impact on how and where card products appear on the site. The site does not include all card companies, or all available card offers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.

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  • Troxus Explorer Step-Thru Ebike – The Troxus Explorer Step-Thru is a fat-tire ebike that I’ve had the pleasure of riding for a while now. It has amazing power, great looks, and awesome range. If you’re looking for a great fat-tire ebike that offers a lot for the price, the Troxus Explorer Step-Thru is definitely one for you to consider. Check out my Troxus Explorer Step-Thru Review.
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  • KBO Flip Ebike – The KBO Flip is an excellent bike. I’ve had a great time riding it and think it’s a versatile bike that can be used for a lot of purposes and can fit a variety of lifestyles. It’s worked out great for me as a general commuter bike and as a food delivery bike. Check out my KBO Flip Review.
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financial panther

Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.

Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.

Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:

  • SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $300 if you complete a direct deposit.
  • 5% Savings Accounts. I'm currently getting 5.24% interest on my savings through a company called Raisin. Opening a Raisin account takes minutes to complete, it's free, and all of your funds are FDIC-insured. I explain how it works, why I'm now using it to store my emergency fund and any other cash savings I have, and why I recommend everyone check it out in this review.
  • US Bank Business. US Bank is currently offering new business customers a $900 signup bonus after opening a new account and meeting certain requirements.
  • M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account.
  • Empower. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.

Feel free to send Kevin a message here.

Filed Under: Career, Financial Independence, Thinking Posts

Reader Interactions

Comments

  1. Angie says

    November 5, 2021 at 3:38 pm

    This post makes sense: we all go in on something. We pick a life partner, and we go all-in on that. We pick a career, and we work at it so we get more compensation over time. And so on.

    I think the reason why we can diversify in stocks but much harder in real life is because diversifying in equities is effortless. It’s literally the click of a button and you can get the mathematical properties of lowering your portfolio’s risk while maintaining somewhat the same returns.

    But while 2 button clicks can let you invest in the SP 500, you can’t possibly start 500 businesses at the same time to diversify. It’s physically impossible. If human beings were ultra-productive and can do years of work in a single day, then I’d argue it’s worth diversifying because there’s bandwidth to support it. But I think other than that: human beings need to specialize because it’s physically impossible to do it.

    Reply
  2. steveark says

    September 9, 2021 at 9:02 am

    I think this points out how everyone’s best investment is in themselves. And you can’t really diversify you. You can try to be a jack of all trades but very few people succeed without becoming very very good at one fairly narrow field. But as you point out nobody has to figure that out on the first try, I had one of the best young engineers I ever knew working for me, brilliant beyond words. But one day he decided he wanted to be a lawyer. Now he is one of the top intellectual property lawyers in the country and loves what he is doing. Great post!

    Reply
  3. David @ Filled With Money says

    September 7, 2021 at 7:06 pm

    Going all in on something is definitely not a bad way to go. I think diversification could be viewed as only for those people who have enough means to actually diversify away from something whether it be through investments or a career option.

    Trying and failing is the only guaranteed path way to success. There’s a reason why 100% of successful people failed at some point.

    Reply
  4. Mrs. FCB @financialchainbreakers says

    September 7, 2021 at 1:51 am

    Agreed, at least in the context of adult decisions and calculated risks. We have two teenagers, and we try to walk a line between the “you need to get yourself on the right path” and “it’s okay to take chances” messaging. Yes, Bill Gates was very successful taking a non-traditional path, but lots of people also make their lives really hard by not taking college and graduate school seriously early in life. And it’s very hard to play catch-up on some of those decisions later on. So, calculated risks and betting on yourself? Go for it. Trying to be a professional surfer when you’ve spent your whole life to date in Nebraska? Maybe some diversification is in order.

    Reply
  5. Marty says

    September 2, 2021 at 3:33 pm

    Of course the risk level changes depending on certain things like your age. An employee who is getting close to retirement age may find it much more difficult to find a job again once they quit their current job. And there’s no guarantee you’ll be welcome back to the same position at your current company either.

    Reply
  6. Accidentally Retired says

    September 2, 2021 at 3:17 pm

    100% spot on here. No decision is ever as critical as you think. I recently read Bezos’ shareholder letters and he often talks about decision making. He labels decisions as either 1) 1-way doors in which there is no return and 2) 2-way door decisions in which you can turn back.

    Most decisions are 2-way doors. Leaving your job was a 2-way door, you could always go back. That was my thought as well, when I took the leap. I think it’s pretty rare to find a 1-way door in your personal life. Perhaps having kids. There is no way back from that 🙂

    Reply

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