I’m a big believer in diversification. Putting all your eggs in one basket is dangerous, especially in your personal finance. Diversification is a good way to reduce your risks. The question is how we should go about diversification. Recently, through a lecture by Professor Robert Shiller, I got a deeper understanding of diversification. In the lecture, Professor Shiller explained that risk – in mathematical terms – is represented by variance, which is a measure of how fluctuating something is. Potential return, on the other hand, is represented by average. An investment could have a high average (that is, high potential return), but if it also has a high variance (that is, highly fluctuating) then it’s risky. Yes, you might get a high return, but there is also a chance that you would lose big. The ideal, of course, is to have a high average and a low variance.
It’s amazing to see the resources we now have online for self education. The possibilities are virtually endless. I still remember how difficult it was before the Internet came. At that time, my best hope was the library, and I had no good one near me. Even in the early years of the Internet, there were only limited resources available. These days though, you can learn just about anything online. Mention a subject and chance is you will find enough materials to fill months or even years of learning. In most cases, the availability of resources is no longer a problem. Given such a situation, I believe these two principles apply to self education: Your curiosity is the limit Since there are more than enough resources out there, what limits you is no longer resource availability. Instead, what limits you is your own curiosity. It’s like someone who explore an open land without any border in sight. How far she goes doesn’t depend on the size of the land but on the amount of fuel she had. Your curiosity is the fuel. The more you have it, the further you will go. Your ability to prioritize becomes increasingly important While […]