Diversification

As Warren Buffctt says, 'Wide diversification is only required when investors do not understand what they are doing." In the end, diversification is a zero-sum game at best. If you are evenly diversified, when one asset class goes down, the other goes up. You lose money in one place and make it in another, but you don't gain any ground. You are static. Meanwhile, inflation, a topic we will also discuss in detail later in the book, marches on.

Rather than diversify, wise investors focus and specialize. They get to know the investment category they invest in and how the business works better than anyone else. For example, when investing in real estate, some people specialize in raw land and others in apartment buildings. While both are investing in real estate, they are doing so in totally different business categories. When investing in stocks, I invest in businesses that pay a steady dividend (cash flow). For example, today I am investing in businesses that operate oil pipelines. After the stock market crash of 2008, the share prices of these companies dropped, making the cash flow dividends bargains. In other words, bad markers offer great opportunities if you know what you are investing in.

Smart investors understand that owning a business that adjusts to the ups and downs of the economy or investing in cash-flowing assets is much better than owning a diversified portfolio of stocks, bonds, and mutual funds—investments that crash when the market crashes.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

A financial planner will say you are diversified if you are invested in different sectors. For example, you may invest in a mutual fund of small cap stocks, large cap stocks, growth stocks, precious metal stocks, real estate investment trusts (REITs), exchange-traded funds (ETFs), bond funds, money market funds, and emerging market funds. While you are technically diversified into other sectors, the reality is you are not diversified because you arc in only one asset class—paper assets. When the stock market tanked in 2007, all paper assets associated with the stock market tanked. Being "diversified" was of little use to those diversified in solely paper assets.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

There are four basic investment categories. They are:

<ol>
<li>Businesses. The rich often own many businesses providing passive income, while an average person may have many jobs providing earned income.</li>
<li>Income-producing investment real estate. These are properties that provide passive income every month in the form of rent. Your home or your vacation home doesn't count, even if your financial planner tells you they're assets.</li>
<li>Paper assets—stocks, bonds, savings, annuities, insurance, and mutual funds. Most average investors have paper assets because they are easy to buy, require little management, and are liquid—meaning they are easy to get out of.</li>
<li>Commodities—gold, silver, oil, platinum, etc. Most average investors do not know how or where to buy commodities. In many cases, they don't even know how or where to buy physical gold or silver.</li>
</ol>

A sophisticated investor invests all four categories. That is true diversification. The average investor believes they are diversified, but most are only in category three, paper assets. That is not diversification.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich