Pick up any newspaper and you will see that we live in unpredictable times. One clear result of such widespread uncertainty is that your wealth may be exposed in ways that might be difficult to foresee. If you take the coronavirus pandemic for example. No one really knows what may happen next. Even so-called experts are only modeling best-case worse case scenarios.
With so much uncertainty, the best thing one can do is be prepared. Preparation comes in the form of diversification. Keeping all of your assets in one form exposes you too unnecessary risk. If your assets are the same class, same industry or same country then if one currency crashes, or one industry or market, you could lose everything.
What Is Financial Diversification?
Diversification means to spread your wealth and investments across a diverse range of assets. This enables you to avoid exposure to any particular risk associated with a specific asset or class of assets. The practice of diversification has many different levels and forms, but it as broadly fall into three categories:
1. Asset Diversification
An example would be investing in different types of shares (e.g. buying shares in the same stock exchange but from a variety of different industries such as mining, pharmaceutical, technology, retail etc.).
This would provide some protection against any unexpected risk that an individual share or share type might face, but if there was a sudden drop in value of the entire stock exchange market, it wouldn’t be of much to help. So this would be the most basic and lowest level of diversification.
2. Asset Diversification Across different Asset Classes
This would involve spreading your portfolio across entirely different classes of assets (e.g. real estate, stocks, bonds, money market deposits etc.).
This would provide even greater protection against systemic risk which might affect an entire class of assets (e.g. if there is a sudden drop in the real estate market, you wouldn’t suffer as much if your portfolio is spread across different classes as opposed to only having invested in property).
3. Asset Diversification Across in Offshore Jurisdictions
This ensures that you are secure against any country-specific risk (e.g. natural disaster, economic collapse, political discontent etc.).
If any of these events take place within the country that you are investing in, no matter how well diversified your portfolio is, all your wealth would be more or less equally vulnerable to rapid decline.
It is for this reason that it is highly recommended not only diversifying your wealth across different asset types and classes but choosing to spread your wealth across different international jurisdictions.
This can easily be done by strategically opening up offshore accounts outside the country where you reside. If you own a company or other investment vehicles it is also advised to place those assets in a 3rd country further reducing your exposure.
Asset protection in unpredictable times ensures that you will not be left without a backup plan. Without a plan in place you will be exposed to more risk than is necessary. Diversify today before its too late.