My maternal grandmother was born in a hard working farming community in Edenton, North Carolina in 1916. Her parents and eleven brothers and sisters lived off the land and fought the same battles as every Black family living in the old south. In the early 1900's, working the farm was unfortunately, more important to the family's survival, than going to school so my grandmother and many of her siblings never made it pass the sixth grade. She however, like many southerners, made her way to New York City before settling down with my grandfather in Washington, DC where she worked as a cleaning lady until she retired in 1981. My grandmother never made more than twenty thousand dollars in any year.
But, she owned her home, never owned a credit card and always deposited money every month into a Christmas fund where she bought presents with the interest earned. She always contributed to an IRA and savings account and even had a 401K that the small cleaning company she worked for provided her. Which she of course - contributed the maximum. My grandmother didn't have a lot of money by today's standards but was extremely diligent and reminded me often that as a country girl, she collected eggs from the smelly chickens every morning and that she learned at an early age,
“Never put all your eggs in one basket but every now and then, expect one to crack.”
What my grandmother understood was simple, the benefit of long term investing, diversification but more importantly, risk. Not bad for a sixth grade education. If you understand that every investment has some type of risk associated with it, you've won three-quarters of the battle when it comes to investing.
The key to successful investing is managing risk while maintaining the potential for adequate returns. One of the most effective ways to help manage your investment risk is diversification. This allows you to manage risk by spreading your money across a variety of investments such as stocks, bonds, real estate, exchange traded funds, private REIT's, commercial equipment leasing programs, natural gas an oil programs (for accredited investors) and cash equivalents such as CD's or money market funds.
The philosophy behind diversification is by spreading the risk among a number of different investment types can buffer a loss in any one investment. It may also help smooth your returns over time. As one investment increases, it may offset the decreases in another allowing your portfolio to ride out market swings, providing a more steady performance under various economic conditions. By reducing the impact of market ups and downs, diversification can go far in enhancing your comfort level with investing.
I'm a child of the 70's but grew up watching reruns of the old black and white shows of the 1950's. One of my favorite shows was, “Father Knows Best.” Well I'd like to submit a new old rerun called, Grandma Knows Diversification.”
