You are investing regularly. But are you really diversified?

Investing regularly is a common practice for many people. However, simply owning multiple funds, properties, or asset classes does not guarantee diversification. True diversification extends beyond the portfolio to encompass a family’s entire financial life. Each month, individuals follow a basic formula: earn, spend less than earned, save the difference, and invest consistently.

This often involves adhering to the 50/30/20 rule, allocating funds towards needs, wants, and savings/investments. Automating savings and investments can help build discipline. Yet, as wealth grows, the question shifts from "Am I investing enough?" to "What exactly have I built?" and ultimately, "What is my overall financial picture?"

This shift highlights the importance of diversification not just at the investment level, but also in one’s life. In the early stages of wealth building, one's portfolio may appear well-diversified. However, as income grows and investments increase, concentration can develop unknowingly. This might occur when investments that have performed well are held onto, leading to a greater exposure to the same underlying risk.

For instance, a broad US equity fund, a global fund, a technology ETF, and an AI fund may all have overlapping holdings. Over time, what started as a diversified portfolio can become one of the primary drivers of financial success. Similarly, property appreciation can seem like a welcome addition to a diversified portfolio, but if it represents a significant portion of a family's net worth, its impact on overall financial stability should not be underestimated.

True diversification is about understanding how the assets in one's portfolio behave when conditions change. For example, in 2022, both shares and bonds were impacted by rising inflation and interest rates, showing the importance of considering correlations between different investments. A technology executive, for example, may have salary, bonuses, and personal investments tied to the technology sector.

If the sector faces challenges, these income sources could decline simultaneously. Similarly, a real estate owner and entrepreneur with similar business exposure could face risks that appear in both areas. A comprehensive view of one's financial life through a family balance sheet can help identify these concentration risks. Budgeting initially focuses on saving regularly, but as wealth accumulates, the money needs to perform various roles.

Some funds should remain accessible for emergencies, some should have time to grow, and some should serve as protection against unforeseen events. Insurance plays a vital role in managing these risks.