Let me take you briefly into the cockpit of a modern airplane. Most can picture the massive array of instruments. As a young boy flying commercially I remember looking into the cockpit and thinking that pilots must be the smartest people on earth. I have seen the eyes go wide when people fly co-pilot with me and see all that impressive technology I control. They are usually surprised to learn that most airplanes only operate on six basic instruments. To a large degree, that confusing and crowded panel is filled with various iterations of those same six instruments.
My airplane has four attitude indicators (five if you count the one on my cell phone) and each one does exactly the same thing. I have six airspeed indicators and five heading indicators. The reason for all this redundancy is that airplanes have to be pretty self-sufficient once in the air, so having a lot of backup is important. As an example, with five heading indicators, it is highly unlikely to imagine a scenario where I won’t know which direction I am going.
All of this redundancy is great for safety but there is a cost. Airplane technology is expensive and each of those instruments has to be maintained. The additional equipment also ads quite a bit of weight which increases fuel costs while lowering cargo capacity.
If I only carried one of each instrument I could fly faster and farther and haul more passengers at a lower cost. It would be my dream airplane, until my single heading indicator failed, in which case it would become a nightmare. The complex panel array in a modern airplane is a pilot’s version of diversification.
I looked up diversification on Investopedia and found this incorrect description relating to investing: “(Diversification) contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.” That generally accepted description is inaccurate because it is mathematically impossible. An average of any sample can not exceed all of the parts. Unfortunately, bad investing often starts with bad math.
So then why diversify? Though it offers no guarantees, the usual goal of diversification is to seek a reasonable return with an acceptable level of risk. Diversification, done properly, is not designed to be the most profitable option for investors, but the more responsible one. I would suggest that Mark Zuckerberg, Bill Gates and the late Steve Jobs, did not become some of the richest people in history by diversifying their stock portfolios. But few investors are willing, or should even consider, the levels of risk they took.
Having a diversity of instruments in my plane slows me down and costs me more, but it also greatly increases the likelihood that I will arrive at my destination in safety. And ultimately, that is my most important goal every time I fly, or invest.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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