Becoming rich is a difficult task, but staying rich could be even more difficult.
There have been plenty of examples in the past of people who became rich but then lost a lot of it because nearly all of their assets were a single business, or perhaps they overextended after building a property ‘empire’. Or perhaps they spent too much money.
I think that once you get rich, it’s important to diversify your money accordingly so your investments are spread across an array of businesses. And then only live off the income generated by those businesses.
Think about if you were one of the early investors in Blackberry. You could have made an enormous amount of money but then lost most of it as the smartphone maker declined. It would have been better to take some of the profit off the table and spread the money around.
Having most of your money locked up in a property or two could also be very dangerous. What if it gets termites? Or burns down? Or tenants create havoc in there whilst not paying rent?
At the very least I’d want to put some of my money in diversified exchange-traded funds (ETFs) like iShares S&P 500 ETF (ASX: IVV), Vanguard MSCI Index International Shares ETF (ASX: VGS) or BetaShares Australia 200 ETF (ASX: A200).
The risk of the entire Australian, US or global share market going bust is much less likely than a single property having a major problem.
To have all of your wealth tied up in a single business can be very risky, particularly for private owners, because competition could erode any sort of moat that exists and reduce the saleable value. We’re seeing that with accountant practices that aren’t updating to the best technology (such as Xero Limited (ASX: XRO)) or perhaps with financial planning businesses that have suffered in value after the royal commission fallout.
I also see a lot of older investors exposed to the same few shares of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB), plus Telstra Corporation Ltd (ASX: TLS) and maybe one or two others large blue chips.
Immediately you can see that owning all of the big four banks is kind of like just owning one because they’re all exposed to the same Australian and New Zealand economic risks.
If I wanted to get domestic economic exposure with good dividends I’d much rather buy shares like Brickworks Limited (ASX: BKW), Future Generation Investment Company Ltd (ASX: FGX), WAM Microcap Limited (ASX: WMI) and Rural Funds Group (ASX: RFF) for the long-term.
Staying rich is about diversification and mitigating the risk that if your golden goose stops laying golden eggs for you that you go broke.
If I were trying to stay rich I would definitely want some of these defensive dividend darlings in my portfolio.
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Tristan Harrison owns shares of FUTURE GEN FPO, RURALFUNDS STAPLED, and WAM MICRO FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Brickworks and Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.