Diversify Your Happiness
I make a case for why diversification, an investment strategy, is surprisingly useful when it comes to happiness, success, and life choices.
You’ve probably heard the adage don’t put all your eggs in one basket. It was one of the golden rules in our household, only it was phrased as “diversify your portfolio.” My dad, who is also my financial advisor, taught me two things at a young age – invest your savings and diversify your portfolio.
Financial diversification is the stock market equivalent of not putting your eggs in one basket. You shouldn’t invest all your money in one stock. The logic is simple. Say you have 100 bucks that you are about to invest in the market. There is some implied risk when you invest – the risk that the stock price falls or the company goes bankrupt. If you invest all your money only in Company A, and it goes belly up, you lose everything. But, if you diversify across Companies A, B, and C, you have spread the risk of loss across the companies. What is the probability that all 3 fail? It’s certainly much smaller than the probability that one fails. Simply put, diversification reduces the chance that you lose all your money.
You may be wondering why I am putting you through an investing lesson. It’s because diversification, while the gold standard in investing, is grossly underutilized in our own lives. Humour me for the next 200-something words and I will attempt to show you why.
A few weeks ago, I noticed that some of my friends were consistently much happier and more satisfied with their lives. Why were they so much better off? What did they do or what did they not do?
They all had one thing in common – they all diversified their happiness portfolio. They invested their time in several different things. They derived their happiness from a variety of different passions, like school, sports, (many) hobbies, extracurricular endeavors, friends, family among several things. It was hard for them to be devastated on any given day because the risk that things go poorly was spread across so many different aspects of their life. On average, it was more likely that they would have a net-positive day than a net-negative.
But wait there is more. In the long run, diversified portfolios generate higher returns. Funnily enough, my friends with more diversified happiness portfolios tend to be more successful. In this context, when I say successful, I mean that they were more likely to accomplish the goals they set for themselves. Were they happier because they were more successful? Or were they more successful because they were happier? I don’t know. Probably both. Research in psychology demonstrates that positive emotions build resilience, or the emotional ability to cope with challenges. You need some of that if you’re going to be successful. But success also results in positive emotions. It’s a chicken and egg situation.
Irrespective of the directionality, diversification seems like an effective strategy, in the stock market and in life. I am going to go evaluate my portfolio, and I hope you will too.