In 2003, Comedy Central’s Chappelle’s Show aired a skit where members of the Wu-Tang Clan (the best hip-hop group of all time) gave financial advice. As part of the fictional Wu-Tang Financial firm, Wu member RZA and GZA spoke of investing in munitions companies, avoiding risk (“protect ya [expletive] neck”), and, most importantly, “diversify[ing your] bonds.”
This classic skit is well over a decade old, yet the sage advice from these New York MCs couldn’t be more current. For new investors under 35 years of age, avoiding risky investments is crucial. And what’s the best way to avoid risk?
Diversify yo bonds (and stocks, funds, etc.).
You’ve heard the old cliche, “Don’t put all your eggs in one basket.” This couldn’t be more true for investing. While you might want to only invest in stocks in a specific company or category, your investments would decline across the board if that stock or sector declines.
Look at the current state of the retail market, for instance. If you only invested in retail stocks like Gap, Macy’s, JCPenney, and Aeropostale years ago, your investments would be worth a whole lot less now, since the industry and those companies are in a massive decline. If you invested in those stocks and index funds, the gains made from index funds would balance out the losses from your retail investments.
Simply put, if you’re buying one thing and it does poorly, you lose money. If you buy many different things, their performance will vary. You might lose money with some stocks but make money with others. This approach affords you the chance to make money with different business types and avoid panicking if one business or industry goes kaput.
How do you diversify?
As we just learned, you don’t want to buy the same stock or type of stock. If you want to invest in tech stocks, you could also invest in another industry, like healthcare or transportation. If you want to buy index funds, consider purchasing individual stocks or other non-index ETFs to balance out your portfolio. The sheer fact that you’re investing is great and all, but if you invest in one thing and one thing only, you’re not spreading out your risk and have an easier chance of losing money.
What other sound advice does Wu-Tang Financial offer?
Plenty. Take a look: