Diversification? How to invest properly for cash flow and retirement

One of the biggest myths about investing is "diversification." The problem is most people don’t really understand what diversification means. Diversification, in its truest definition, means to spread your assets among different investments. But what most people end up doing, is over-diversifying. Meaning, that people invest in too many assets in one class and neglect having assets spread among other diversified classes themselves.

I always say: concentrate within asset classes but diversify among asset classes.

That means if you are going to invest in real estate, you should have one type of real estate asset, for example, single-family homes. And that way you can become more of an expert in that particular market and understand the nuances of it compared to other assets within the class, such as strip malls, vacant land, industrial, etc.

Likewise, most people invest in the stock market by using exchange-traded funds, or ETFs. When you use ETFs as your investment strategy, you are likely over-diversifying, especially if you have two or three ETFs, or mutual funds which are essentially the same thing, with higher expenses and more active management.


For example, if you have a mutual fund of large-cap stocks, an ETF of the S&P 500 stocks, and two or three different bond funds, you are probably over-diversified in many of those classes. 

One of my mentors, William O’Neill, who I think is the second greatest trader of all time, says that you should only be in a few different stocks maybe one or two if your portfolio is less than $500,000. From $500,000-$1 million you should maybe have three or four stocks and from 1,000,000 to 5,000,000 maybe four or five stocks maximum. Think about that

It actually makes sense because now you have the ability to stay abreast of a few companies, and you don’t have to worry about the day-to-day goings-on of the stock of dozens or hundreds of different companies - or even one ETF that takes all of the companies, the good and the bad, and makes one average or less than average return.

So how should you invest? Well, it’s different for everyone, but if possible, you should be in several different asset classes. Here’s how I like to break those into four different asset classes. 

First, hard assets. These are things that you can actually touch like real estate. Preferably cash-flowing real estate. That way during the downturns in real estate you are at least still making an income or have the potential to make an income. Vacant land generally does not have cash flow associated with it, so when Real Estate is down, you are basically sitting on dead money.

Second, you should have soft assets. Things like stocks and bonds. Again, preferably cash-flowing stocks, and bonds. However, within the stock class, you should just have a few investments that you can watch, as we mentioned above. The same with dividend-paying and interest-yielding bonds. Don’t have too many, just make sure that you have quality.

Third, you should have some kind of tech assets. It’s no secret that the economy is powered by technology, and technology seems to be more and more a part of our everyday lives. In fact, if you want to look to the future, you should look to technology to help you stay ahead of inflation, and I invest in the future so, one type of asset in tech assets is Bitcoin. This is not an article about Bitcoin, but it’s certainly something to consider since it’s an inflation hedge, a store of value, and a potential future currency. But there are other tech assets out there that you may invest in as well. The problem with Bitcoin and other stores of value, like gold, silver, platinum, etc. is that they don’t pay a good cash flow. I like assets that cash flow.

Fourth, you should consider investing in yourself. Most of the wealthy people that I know are big believers in always learning, in personal development, and getting better each and every day.

Oh, and if you are in your own business, you should invest more in yourself via that mechanism as well. You should know your business, You know the pitfalls. You know the opportunities and you know the potential. If you invest in yourself through your business, you have another potential source of cash-flowing assets. 

So this is really up to you to decide how you should invest. But I don’t believe that anyone should give up their power in their health, their wealth, or their time. They should just take control. Now, what does that mean?

Most people don’t want to take control. They would rather give up control to someone else. That’s fine, as long as you can watch what they’re doing and understand the ins and outs of what’s going on. Don’t let it be too complicated for you because it isn’t.

So, take some time to sit down and plan your future it’s the most important thing in your life and every day that goes by is a day that you miss out on a more positive future day.