A relative of one of our team has put all their investable assets into one asset class. While it is theoretically possible for the “All-in” strategy to be a winning one, it is highly dangerous and statistically improbable for it to work.
There are many reasons a one-asset class investment strategy is a bad idea and almost never endorsed by financial advisors. Here are several:
You Picked the Wrong Asset Class
With dozens of asset classes, it is easy to select the wrong one. In this case, the investor has gone all-in on Crypto Currencies. Each asset class has its own specifics, but in the case of Crypto, it is an especially risky group and as a whole still not a universally accepted investment vehicle unlike real estate, stocks, bonds and the like. An asset class can be out of favor for many months or even years putting an investor into a position of no flexibility.
You Might Need That Money
With a concentrated investment portfolio, there is great risk that the value can go up or down dramatically in any given period of time. If the value is trending down and you have a need for cash at that same time you are in the unfavorable position of being forced into locking in a loss. With a diversified portfolio, the odds of that happening are much lower. At any time, a serious illness, death, disability, divorce, unemployment or other calamity can happen and a concentrated portfolio can exacerbate an unexpected turn of events.
With a Family, Even Riskier
A single person with no children can normally afford to take on greater risks. In our example above however, the relative has a family with young children. A single-asset investment portfolio is doubly unwise as kids’ college educations can be at risk, critical hospital bills and even housing can be impacted if that asset class turns the wrong way. All else being equal, professional financial planners would never recommend a young family only invest in one asset class.
Being in the wrong investments at the wrong time can and has postponed the retirements of millions of investors. The delay can be made much longer if all your money is in one sector of the market, and that delay can possibly be many years. In the case of a new and unproven investment like crypto, the family in question could lose the entire ability to retire.
The old adage of “don’t put all your eggs in one basket” while simple, does work well and for that reason is a staple of advice by financial advisors. While it is true that a portfolio’s returns can be boosted by focusing more of a portfolio, the Mae West saying of “Too much of a good thing can be wonderful” does not apply to investing.