Safety In Numbers

April 21st, 2008 at 01:21pm Tom Muldowney

   Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF® 

For certain things, one is not only enough, one is all that you should have….my wife of 36 years reminds me of this regularly! 

On the other hand, you have probably heard the old yarn about the mountain hiker who lost his balance and fell off of a cliff only to land in a small tree on the side of the mountain.   He prayed “Dear God, please save me.”  He was surprised when he heard a booming voice come out of the sky.  He was most curious when the voice said,  “Trust me.  Let go.  I’ll bring you down to safety.”   It was at that time that the climber looked up toward heaven and asked aloud; “Is there anyone else up there?”   It is easy to see that our climber would have at least felt a little bit more secure if he had heard another voice or saw a rope coming down from heaven. 

For much of the rest of our experiences, we can find that there’s safety in numbers.   

Consider a chain.  A single link, as strong as it may be, cannot tether an elephant.   Nor could you hoist an engine, or ride a bicycle with a single link.  

The joy of a youngster swinging on a swing could not be arranged with a single strand of cord.  A basketball game cannot be played with only a single player and a good poker game needs 52 cards with  five or six players. 

Even the insurance that we buy to protect our families could not be sustained if there were only one insured person.  The insurance company needs thousands and thousands of lives on which to calculate the risks and to spread the costs.  It is with the arrangement of these large numbers of individual units, that we find safety. 

The same is true for wise portfolio construction.   

You cannot build a safe portfolio with all of your investment money wrapped up in a single stock.  Recent history brings to memory the stories of people who lost their retirement security, seemingly overnight, because they invested in just “Enron,” or just “Worldcom”, and more recently just “Bear Stearns.” 

So where does this safety come from?  In the domestic investment world, you can invest in a
US mutual fund that has hundreds of US stocks. For a bit more safety, you can invest in an index fund which has thousands of US stocks.  For a handful of you readers, you might be a bit skeptical about investments in our
US economy.   It has not behaved very well lately!  This gives you the chance to invest in the companies of other nations…after all, you use Nestle Chocolate (Switzerland) in your milk, BP Amoco Oil (United Kingdom), Bayer aspirin (
Germany).  You drive in your Volvo (Sweden) after talking on your Nokia cell phone (
Finland).  You are already an international customer, so why not apply this lesson to your portfolio? 

For investing, consider the incremental safety if you invest in more funds, including an international flavor.  Now you can add Europe to the mix, then the Pacific Rim, then emerging markets like China, India, Korea, and many, many others.  Pretty soon, your investments will include thousands of companies in hundreds of cities in hundreds of nations. 

There is clearly safety in numbers…at the first level within an investment fund and secondly with the ability to invest internationally. 

The lesson contained herein is easy enough…  While you have the ability to concentrate your investments in a single company, or a single fund, or a single country, you give up a bit because of the potential for risk…that is, something to go wrong.  A diversified collection of investment funds in a vast array of companies spread out over every free market nation in the world can be woven to provide your own financial safety net. 

Your mom was right.  Don’t put all of your eggs in one basket!   There’s safety in those numbers. 

Entry Filed under: Financial Planning, Investments