I’ve been contemplating recently how we humans seem to have a tendency to define ourselves by one or a few things, be it our work, our family, our hobbies, or our beliefs.  I haven’t dug into the research behind what exactly drives our personal identities, but I’ve certainly felt this on a personal level. The question, “Who am I?” has nagged at me for as long as I can remember, and I’ve tried many times to satisfy it: I’m an environmentalist. I’m a financial planner. I’m a Bostonian. I’m a New Yorker. For me, some of these identities remain while others have died away due to changing circumstances. Some were easy to let go of (I’ll visit Boston again from time to time), but others were like ripping off a limb. For instance, I had to move through a lot of guilt and inner turmoil around leaving behind my “career environmentalist” identity to pursue a new passion of financial planning. Thankfully I eventually realized that I can be an environmentalist and a financial planner, amongst all the other things that bring me joy and meaning.

It’s painful, and potentially even dangerous when your sense of self is wrapped up too fully in an aspect of your life that has reached its expiration date. The same principle applies to investing. Investing all our wealth in a single stock or asset class is a risky proposition; sudden changes in the market or the unexpected implosion of that particular stock can have a significant impact on our wealth. This is why at Thinking Big we always recommend that our clients invest in a diversified portfolio spread out across a combination of many different stocks and bonds (using ETFs). 

The benefits of diversification are manifold, and it’s striking how similarly it benefits both our personal lives and our investments. 

Read More: How to Build an Investment Plan that Works for You

Reduced Risk and Resilience to Setbacks

Diversifying our identity can help us cope better with setbacks and challenges. This is particularly important in today’s world, where sudden changes in one area of our life can have a significant impact on our overall well-being. Many studies have shown that having a diversified identity improves well-being, satisfaction with life, and overall success. For example, a study published in The National Library of Medicine found that participants whose only role in life was tied to their employment had a higher risk of psychological distress. If we experience a setback in our work life, having other robust areas of identity can make us more resilient in the face of adversity. 

Similarly in investing, diversification helps us reduce our overall risk by spreading it across different assets in our portfolio. For instance, if we invest in only a few different stocks, and one of them takes a hit, the severity of that impact on our portfolio will be significant. If we instead invest in hundreds or thousands of different stocks, an individual company taking a big hit (or altogether failing) will hardly make a dent in our overall performance. 

Diversification also helps us optimize our returns by investing in a mix of assets (stocks vs. bonds) that have different levels of risk and return. Stocks tend to be more growth-oriented and volatile, while bonds tend to be much slower growing (at pace with inflation) and stable. By giving ourselves the ability to adjust the levers of growth (stocks) and stability (bonds), we can achieve a better balance between risk and return that suits our individual financial goals and risk tolerance.

Balance for the Journey

Diversifying our identity isn’t just a hedge against risk, it benefits us by bringing a balance to the energy we put into the various aspects of our lives. I know that I have more than one interest and set of needs, and when I’m addressing all of them, it keeps me from focusing too much on just one and burning out. I notice this even in things that bring me a lot of joy, like learning the guitar. Even within that fun part of my life I’ve stretched myself too thin by putting too much on my plate to learn. I found that, ironically, putting the guitar down and switching my attention to other things actually gives my brain a chance to process what I’ve been practicing, thus making my journey more rewarding. 

In financial planning, we often tell our clients that “investing should be boring.” What we mean is that a good investment plan doesn’t rattle you into making a rash decision as soon as something feels off balance. For instance, a client who is investing for a life event or purchase 10 years from now and using an aggressive approach of 100% stocks will have a wild ride of ups and downs. In the near term, the portfolio will fluctuate constantly, and it’s much more likely that a sudden drop in the market will make them rethink their strategy and move things around when it’s disadvantageous. Or, at the very least, the ups and downs of the market will make the journey stressful. On the other hand, dedicating a portion of the portfolio to bonds will act as a ballast, preserving a fixed portion of cash that doesn’t move with the market, making the ups and downs less extreme. The ultimate goal is to have peace of mind knowing that you’re growing your wealth sustainably and safely. 

Diversification is an essential principle that applies not only to our lives but also to our investments. By diversifying our identity, we can lead a more balanced, fulfilling life that takes into account all the different things that bring us satisfaction and meaning. Similarly, by diversifying our investments, we can reduce our overall risk and optimize our returns, which is essential for our financial well-being.