The Firewall Principle, and Why Diversification Isn’t Just for Investing
My personal portfolio is predicated on the idea of building “firewalls” between my assets.
I’m referring to the original meaning of the word firewall — an actual wall constructed, often between buildings, to prevent the spread of fire. I invest in multiple uncorrelated assets so that if a “fire” breaks out (e.g., the stock market tanks), the losses won’t spread throughout my whole portfolio. Because I’m committed to financial diversification, it would take an unprecedented downturn of all asset classes simultaneously to completely derail my investments.
I like this idea of firewalls so much that I’ve been thinking about how I can be better at using the same principles in other aspects of my life.
I’ve realized that by diversifying my skills, income streams, investments, and even my friend groups, I can become a wealthier and more resilient person.
The more varied and impressive your skill set, the more valuable you’ll be to your primary employer. This includes soft skills, like learning to be a good listener, as well as harder skills, like learning how to code. The more talented you are in multiple domains, the safer you should be if your company starts to downsize.
Furthermore, a broad range of skills can allow you to start a side hustle. If you only know how to do one thing, you close off all those potential opportunities for earning more money.
A diverse set of skills can also lead to bartering with friends. You might agree to help them with a project in exchange for the use of their skills down the road. My friends who are good at building things always seem to be helping other friends with home improvement projects. That kind of generosity, and the reciprocation that follows, is only possible because these folks have many useful skills.
At the very least, it’s important to develop your computer skills until you have basic competency. If you want to participate in the modern economy, tech literacy is increasingly important. I recently read the book “Janesville,” which tells the heartbreaking story about what happens to a small Wisconsin town when the manufacturing jobs leave. Some of the displaced auto workers go to technical school and get a rude awakening. The author writes about how, according to the teachers at the technical school, “The most surprising fact about these arriving factory workers was how many of them didn’t know how to use a computer—didn’t even know how to turn one on.”
I also use this idea of skill diversification as an excuse to occasionally pay for basketball leagues and gear. I’ve offered private basketball training in the past, and it can be a great side gig. But If I don’t keep my skills up, I lose my potential revenue stream! At least that’s what I tell my wife when I buy new athletic shoes.
A big reason to diversify your skill set is to gain the option of earning money in a variety of different ways. If you develop multiple sources of income that are completely separate from your main job, your earnings will be separated by firewalls — just like the assets in a diversified portfolio. That should increase your odds of staying above water should you lose your main job or any one of those income streams.
To be clear, I still think it’s a good idea to become elite at your primary job. In general, you’ll make the most money when you specialize in a specific area and get really good at it. But if you’re trying to pay off debt or build an emergency fund, having multiple streams of income can help you make measured progress toward those financial goals. And when money is coming in from multiple sources, more options become available to you: It can help you bridge gaps between jobs, take the leap into entrepreneurship, or simply offer additional insurance against a job loss.
I was surprised to learn that 90% of the new jobs created in the next 10 years are expected to be service jobs. That means there will be side hustle opportunities galore. Companies like Uber and Lyft are making it easier for almost anyone to make extra money by becoming a driver. Going forward, there should be plenty of options for those who want to make some extra money on the side.
- Related: How to Make Extra Money
Social networks create an important fabric that can help you better enjoy the good times and survive the worst. Some people are lucky enough to have multiple friend groups from high school, college, their neighborhood, and their job. But many others, whether due to time constraints or other factors, have a much smaller or concentrated circle of friends.
Some people I know seem to almost exclusively hang out with a few people from their work. There’s nothing wrong with that, but it can be a fragile situation. If they end up losing their jobs or moving away, they might be left scrambling to build up a new social life.
If you make it a priority, you can build multiple groups of friends that you rely on for companionship and advice. That way, if you lose your job, choose to switch careers, or have a falling out with one group of people, you aren’t completely alone in the friendship department. Some good ways of doing this can include joining a sports league or finding like-minded people on Meetup.com.
Don’t be quick to dismiss friends that you only talk to online, either. I participate in an online forum that has kind, engaging, and funny people who I would consider to be my friends. For those who are more introverted or don’t have a lot of time, becoming part of an online community can be a nice way of building up a new set of friends that is uncorrelated with the friends you hang out with in person.
While there is no one best investing system for everyone, there are certainly benefits to selecting a diverse set of assets. Just pick your favorite portfolio simulator and run the numbers — you’ll find that portfolios with a balance of risky and less risky assets tend to have better risk-adjusted returns. While there’s always going to be a contingent of folks advocating for high-risk, high-reward investments, most experts recommend a balanced approach for the average person.
If you’re prone to anxiety when the market takes a dive, setting up investment firewalls is highly recommended. It certainly helps me sleep better at night. Furthermore, volatility hurts stock returns and causes people to make rash decisions, such as selling their stocks in the middle of a downturn. A balanced, diversified portfolio is generally considered to be easier to stick with, which can save you a ton of money in the long run.
It all comes back to the old adage: “Don’t put all your eggs in one basket.” If you’re overly specialized in your career, or your entire net worth is tied up in an illiquid asset like a house, you could be setting yourself up for disaster.
Diversifying different areas of your life is almost like buying insurance. There’s an upfront cost in time, and often in money. But building a few well-placed firewalls can give you peace of mind and save you when things get rocky.
More by Drew Housman:
- How Delaying Retirement – Even by a Few Months – Can Help Erase a Savings Shortfall
- Trying to Time the Market? Missing Just a Handful of the Best Days Can Tank Your Returns
- The Most Motivating Financial Chart I’ve Ever Seen
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