The Wealthy Retiree Part 6 – The Importance of Diversification
Quaero and Will walked briskly down the sidewalk despite the summer heat and humidity. Will was walking at a remarkably quick pace for his age. It was Tuesday. That day now had a very special meaning to Quaero because it meant that he would get his next lesson on retirement success from the wealthy retiree, Will Pecunious, a resident of the complex where Quaero worked as a handyman. Unlike the other lessons where Quaero paid Will for the advice with a sandwich from the local deli, Will told Quaero to forget the sandwich today. This lesson would include something different.
As they walked, Quaero had a difficult time keeping up with the 83 year old. They spoke very little; Will was a man on a mission.
They turned the next block and Will stopped at a large white hot dog truck that had a line that must have been 15 people deep. Quaero was confused.
“Why are we stopping here, Will?”
“We need to get lunch, don’t we?” Will fired back.
“Trust me; this will be the most valuable hot dog of your life”
“I trust you” Quaero replied sheepishly.
As the vendor served his customers with great speed, Quaero and Will were at the front in a matter of minutes.
“Hey Tom! How are you?” Will called to a man in the back of the truck cooking the hot dogs.
“Will! Been a while. How’ve you been? You look great!” Tom replied.
“I’ve been really well, thanks. Looks like business is as good as ever. We’ll take four dogs with everything and two Cokes”.
“You got it!” Tom said as he turned to prepare the order.
Quaero looked puzzled. He turned to Will and whispered, “Who are the four hot dogs for?”
“You and me, of course! Once you try these dogs you’ll want another one, trust me.”
Quaero raised an eyebrow and said, “I trust you.”
Tom brought their order to the window, Will paid, said his goodbyes and both him and Quaero headed over to the picnic tables just next to the truck.
“Wait until you try these dogs, Quaero. You will not be disappointed.” Will said as he began to unwrap the first one.
“They look good.” Quaero replied.
“I wanted you to meet Tom. He is an incredible guy. He has four businesses.” Will said as he jammed the first hot dog into his mouth.
“That’s right. He sells hot dogs in the summer, pumpkins in the fall, plows driveways in the winter, and sells garden mulch in the spring. No matter what the season, Tom is thriving.”
“Wow, I can’t imagine how he keeps up with it all.” Quaero replied, still in a little shock.
“Tom knows that the seasons change. He knows that selling hot dogs in the winter is not a smart move. Nobody wants to stand outside a hot dog truck when it’s 20 degrees. He also knows that he can buy a lot of his equipment for any of the businesses in the off-season. That is when people are willing to sell it at a discount. He just bought a new snowplow in May. Got it for a song, too. The old owner didn’t want to hold it through the summer.”
“That sounds like a really smart business strategy.” Quaero said as he polished off his first hot dog.
“It is. It’s called “diversification”. You see, it doesn’t take a rocket scientist to figure out that winter will follow fall every year, or that summer comes after spring. We all know this. Tom sees the big picture and takes advantage of others impatience. The same should be true of your investing. Your portfolio needs to be balanced with different asset classes that don’t all perform well at the same time. Do you think in the summer, when its 100 degrees out Tom would ever consider selling his snow plow business?”
“No way!” Quaero replied.
“Of course not, just because it’s hot in August doesn’t mean the snow is not going to come in January. Tom is prepared whatever the season. The difference is, Tom can predict the seasons. You and I cannot predict the cycles in our investing. No one can tell you when winter in the stock market is coming. Despite what the so called ‘experts’ claim.”
“Well, what asset classes do you recommend that fare well in different seasons?” Quaero asked.
“It’s important to have a mix of large cap stocks, small cap stocks, international stocks, real estate investment trusts, and bonds. Having a proper mix of these assets will provide you with the protection that when it’s winter for stocks, it will be summer for bonds. You will have enough asset classes that some may zig while others zag. In fact, just as Tom knows that he will not sell any pumpkins in the spring, you must understand that there should always be an asset class in your portfolio that is not performing well. If everything is doing well, you are not diversified properly. That, my boy, is the basics of sound investing strategies and solid diversification.”
“How do I know what the proper allocation for me is?” Quaero asked confused.
“That is a great question and not one I am equipped to answer, Quaero. It might make sense for you to talk to a professional financial planner to help you design the right allocation for you. I can tell you that it should be based on your age, risk tolerance, and how much time until you need your money.”
“That makes sense. Maria and I will call a financial planner first thing tomorrow.”
“Don’t jump the gun yet. Wait until we get to the lesson on hiring the right planner. In the meantime, go online and find a website that can help you create an allocation. That should suffice until you speak with a professional. The sites are free and very easy to use.” Will concluded as he finished his second hot dog and began balling up the wrapper to throw away.
“Great, we’ll do that until we hire the right advisor. Thanks Will, you’re a lifesaver.”
“Don’t thank me, thank Tom,” Will said with a smile as he looked down and noticed Quaero had finished both hot dogs long before he did.
Next Issue: Lesson #6: “Guarantee?”