Matt: Welcome! If you’re new to the channel, my name is Matt Jimenez. I’m an entrepreneur who has worked with the greatest minds in finance over the last several years, and I’m here to share with you everything they’ve shared with me. Today, I have one of those minds that I actually referenced in that intro. His name is Joseph Brown. He is the founder of Heresy Financial, and he has probably my favorite financial YouTube channel to date. Today, I want to go over a couple of things with him because he has very interesting topics and perspectives related to finance. So, welcome to the channel, Joe. This is your second time here and a familiar face on the channel.
Joseph: Yeah, yeah, thank you for having me out again.
Matt: Awesome. So today, I wanted to go over a couple of things. The first thing I wanted to discuss was a video you made about a week or two ago. It referenced the Bible and various topics related to finance in the Bible. The first thing that came to mind, because it’s something that’s very talked about, is the Holy Grail of investing. You mentioned it in your video, saying Ray Dalio suggested having about 12 investments is the ideal situation. But you actually pulled it even further than Ray Dalio and brought it from the Bible. Can you touch on that and how the Bible actually tells us to have a diverse portfolio?
Joseph: Yeah, absolutely. It’s really funny because Ray Dalio calls it the Holy Grail of investing. So, it’s funny that one of the oldest places where you can find that exact same advice is actually from the Bible, since he calls it the Holy Grail. I don’t even think he’s aware that it’s found in the Bible. But yeah, the traditional advice when you talk to a financial adviser or anybody with a basic understanding of money is to diversify your investments. It’s a very basic concept: if you put all your eggs in one basket and you drop the basket, your eggs crack. So, don’t put all your eggs in one basket; spread it around a bit. That way, if one thing fails, you still have most of your wealth left over.
Today, people take that, in my opinion, way too far. They think if it’s good to diversify a little bit, then it’s best to diversify the most possible. They literally spread their money among every investment possible, which is what index investing is. It’s kind of ridiculous when you think about it because, to be a good investor, you have to be a good capital allocator. You’re taking your capital that you’ve earned and allocating it to somebody or a group of people that you believe will do something really good with it and give you a return on the investment. So, why would you mindlessly and blindly spread out your wealth among every single company possible when most of the returns in the market have always come from a very few number of companies?
You don’t want to take this example too far. Ray Dalio did a very large study, investing a lot of money doing simulations among hundreds of different time frames in many different markets around the world, and found that to have true diversification, you don’t need a thousand companies. You don’t need 500 companies like the S&P 500. If you invest in the SPY, that’s 500 different companies. You don’t need that. What you really need is somewhere between 8 to 12 different assets. That’s it. The reason why you don’t want to go past that is because not only do you have diminishing returns, but you actually start to have decreased performance.
Let’s say you have 500 different companies in your portfolio. If one of them does really well, it doesn’t make a dent. It doesn’t impact you. Similarly, if you have two companies and one does really badly, you might lose 50% of your wealth. So, The Sweet Spot, which he calls the Holy Grail, is like 8 to 12 different assets. That gives you the sweet spot of, “Hey, if one does poorly, the worst-case scenario is you lose about 10% of your portfolio, and you still have 90% left over.” But if one does really well, you still have enough exposure to that one asset that, if it does really well, it makes a huge impact on your portfolio.
The key is that it’s not just about, let’s say, 10 different stocks. If you pick 10 stocks that are the 10 biggest stocks in the S&P 500, they’re going to have high correlation, meaning they’ll go up together and down together. If one does poorly, they’re probably all going to do poorly. The trick is, and this is the hard part, you have to find 8 to 12 different assets that are uncorrelated, meaning they don’t move up and down together. This advice was found all the way back in Solomon’s time. He’s considered the richest and wisest man who ever lived. It’s an ancient proverb that you have to make sure your money is spread out between seven or even eight different investments.
Matt: Wow, I really like that because…
Please visit Understanding the Reality of Investing and Trading to watch the full interview on YouTube!
