Why We Diversify

Europe’s debt crisis has hung like a dark cloud over a market that was supposed to soar on QE2 and options expirations. Indeed, even the best laid schemes of mice and Fed chairmen go oft awry.

The pressure on Ireland to accept a bailout brought unwanted attention on Greece, which is heading towards default as soon as January. The EU hopes an aid package for Dublin will stabilize the euro bond markets and take pressure off of Spain and Portugal.

But no deal is going to keep bond investors from noticing their excess of debt. In fact, it’s only the relative severity of Europe’s problems that have averted greater vigilance about ours — for now. (Mark this well, Harrisburg, Penn., California and Secretary Geithner.)

This crisis demands a return to first principles. Financial Planning 101 teaches that people (and nations alike!) should above all avoid insolvency and instability in their finances. People (males particularly,according to behavioral finance research) seem to be poorly wired for investing.

They tend to have an inherent optimism and often overconfidence in their portfolio decisions. They invest not only money but also hope as they anticipate success.

But this is the wrong approach. Just as doctors are instructed, “first, do no harm,” so too financial planners understand that protecting against the downside is the first step in investing. You might think that Acme Widgets will shoot to the moon; you might think that it’s a steal at its current price-to-sales ratio; but you might be wrong.