Posted on September 16, 2013
Income Diversity & Why You Need It
Nearly every financial planner on the planet will say you have to diversify your portfolio. Sounds like great advice, right? Spread out your investments to reduce your risk. You will often hear “Its the safest way to a good retirement!” and lots of other similar phrases that they have committed to memory and keep ready at the tip of their tongue. But to make money, you often have to
put at least some money on the table. The challenge for your financial planner is that he needs you to stay in the black to keep your business. Lack of diversity, and therefore high risk, is not something that generally helps pay their bills. You may have missed out on a single stock or fund skyrocketing but diversity helps cover him when his other fund suggestion tanks. Again, as long as you stay in the black, he did his job and you will likely keep your retirement planning business with him.
Now, take a step back and ask yourself this: If diversity is so highly regarded for our retirement income , why is it so frowned upon for our current income?
I have talked about income diversity with friends and coworkers before and the most common response is one of those typical “Are you crazy?” looks. They usually follow that with a creative “Why would you want to do that?
To diversify and reduce my risk.
When you only have one source of income, you have the most at risk if you ever lose that source. Think about it: if you take the typical conversation with your financial planner about diversification, you can substitute “portfolio” with “income” and the entire conversation still makes perfect sense. If you are an employee, the risk is even higher…yes, even if you like your job & company. Your job, department, or entire company could be eliminated without any advanced warning. Again, think about it…is your boss or the CEO sharing the company’s financial statements with you? Do you actually read them if they are available? Do you know the company’s strategy and how that will impact your position? Today marks the five year anniversary since the Lehman collapse. I know several former employees that were shocked to hear about the company’s future downsizing but they were set to receive golden handshakes as they left so they knew they would be fine. The real shock was when those employees found out less than a week later that their layoff package no longer existed and the entire company was folding. How many of those employees were left scrambling becauee they didn’t diversify their own income?
Having income diversity will help you get by with one less source in the same way that a diversified portfolio protects you when one stock tanks. Contrary to popular belief, having other streams of income does not mean you dislike your job or that you are planning to leave. It simply means that you are preparing yourself in case one source of income ever diaappears.
For myself, I have created rental income and run a home business. If you would like to know about either, just ask. Whatever you do, make sure to add at least one other source of income to diversify and reduce your risk.