Each year, Forbes releases its list of the top 400 wealthiest people in the world. These people are the movers and shakers, the heavyweights who make the world rotate on its axis. Being merely a millionaire is not enough to get on this elite list. To become a Forbes top 400 member, you need a half billion dollars at the bare minimum. In actuality, most of the people who appear on this list are billionaires.
At the same time, if you study the history of this list, which first started being compiled in 1982, you will learn some startling facts. One fact that you will learn is that out of the 400 richest people in the world who appeared on the list in 1982, less than sixty are still on the list today. The biggest question that one has to wonder is why is this so? Why is it that the vast majority of the people who were on the list then are not today? What happened?
If there is one word which can be used to answer these questions, that word is “diversification.” In the world of investing, diversification is a lot like the word “inflation,” it is a word that everyone is familiar with, but one which only a few truly understand. Many of the people who appeared on the 1982 edition of the Forbes top 400 are no longer on the list today simply because they failed to diversify. You see, the greatest fortunes in history, particularly in American history, in most cases are based on one source. For the Rockefeller family, it was Standard Oil. For Bill Gates, it was Microsoft. For Michael Dell, it was Dell Computers.
While it is true that you can become extraordinarily wealthy by concentrating your forces in one area, over time, it is unlikely that this wealth will be sustained. The reason for this is because industries often rise and fall, either as a result of supply and demand fluctuations, or simply because technological achievements are made which make certain industries or tools obsolete. Since many rich people derive their wealth through a single source, this wealth is dependent on that source in order to sustain itself.
To build true wealth which lasts for generations, you must master the art of diversification. If you've read other books on finance, you're probably familiar with this term based on the investment principles that many financiers teach in regards to the stock market. People are typically told to buy stocks from a wide range of industries, so that they survive the ups and downs, growing their wealth over time. This is the stock market definition of “diversification.” However, many of the richest investors in the world don't diversify at all. Warren Buffet, one of the richest men in the world, has said that diversification is for the ignorant, and that there is little reason for an investor to diversify when they know what they're doing, however Mr. Buffet is highly diversified with investments in everything from Coca Cola to Geico. Diversification in the world of stocks and bonds is a strategy that is used by the common investor, not the elite investor who gains stupendous returns.
In fact, in the stock market, diversification can be dangerous. Mutual funds are risky because even though they perform well during bull markets, investors can be totally wiped out during a bear market. Additionally, when you invest in a mutual fund, you're assuming nearly all the risk, while only gaining a small profit in comparison to the mutual fund manager, who assumes no risk but makes the highest fees. When I use the term “diversification” in this chapter, I'm not talking about diversification into stocks, which I feel is dangerous. When I say “diversify,” I'm talking about diversifying into the different asset classes that exist in the investment world.
Regardless of how rich you may become through one source, you are still dependent on this one source in order to sustain your wealth. If this source or industry should decline for any reason, your wealth could be in danger. It is for this reason that so many wealthy individuals and groups have risen and fallen in wealth over the ages. The problem is that they often become too dependent on a single source of income, and once this source evaporates, their wealth evaporates with it. Like the great empires of old, these people often end up in the financial history books, an interesting source of study but little else. To avoid this fate, you must follow a financial philosophy I will call Exponential Expansion.