Investing & Identity
Parallels between portfolios and people
Despite graduating with a degree in business, I have never been motivated by the idea of maximizing my net worth. I aim to live comfortably and save for rainy days, but ultimately define “richness” as wealth in relationships and experiences. Consequently, I spent the majority of my university Wealth Management class distracted, trying to defend the growing field of sustainable finance, or calculating how much money I need to save to buy a tiny house out west. That said, business has long interested me for its broader applications beyond making money, and I walked away from school with a few personal finance lessons that I believe apply equally to one’s personal life.
Diversifying Portfolios
One of the first concepts Professor Chuck bestowed on our group of business students was that of diversification. When building a portfolio of financial assets to invest in, it is highly recommended to vary its components in order to reduce risk and eventually, maximize returns. This involves ensuring the investments come in a variety of forms, and are related to companies in a range of different industries. That way, external trends and events do not have the same effect on all assets you’ve got a slice in.
Some risks are systematic, they cannot be mitigated through diversification. These affect all companies and industries, and are caused by undiscriminating factors such as inflation, political instability, and increasingly, the climate crisis. Alternatively, unsystematic risks are specific to an industry or market. For example, if you were to only purchase stocks in Canadian utilities companies, risk would remain high since these organizations are vulnerable to similar forces. Their success, or lack thereof, is highly correlated.
Diversifying the Self
Since being introduced to the idea of self-complexity during my first few years of university studying Health Sciences, it has grounded how I approach thinking about self-identity. Self-complexity is the degree to which someone maintains a number of different components that make up their sense of self, including — but not limited to — a variety of roles and traits. Individuals can exist anywhere on a spectrum of self-complexity, and this level can have many effects on one’s relationships and resilience.
One personal experience that solidified the importance of maintaining high self-complexity was that of acquiring a series of injuries as a high school (wannabe) track athlete. At the time, I spent most of my time either preparing to run, running, recovering from my run, thinking about my next run, and hanging out with other runners. While I dabbled in other interests, such as science and photography, it is safe to say this sport formed a good portion of my identity.
When I had to scale back on pavement pounding, it forced me explore other ways to move my body, other types of people to surround myself with, and other passions to obsess over. Fortunately, by the time I left competitive running all together, my self-complexity had increased to the point where the removal of any one component would merely be taken as an opportunity to discover another. If I had continued to view myself solely as a runner, I would have exited the sport feeling entirely lost and lacking confidence.
The Parallel
In both cases, diversification reduces risk and promotes resilience. In the world of investing, selecting a variety of financial asset classes maximizes returns. In individuals, your identity asset classes include types of knowledge, experiences, and communities. Dipping into as many of these as possible creates more identity capital, and a sense of self that is less vulnerable to impacts by external factors.
Diversification includes choosing investments that are not highly correlated. For instance, the performance of an airline and rail service are more closely related than an airline and a grocery chain, since they are both affected by travel trends. Similarly, one’s affinity towards painting and their creative confidence are highly correlated, more so than their love of art and role within a family unit. Exploring and developing all aspects of one’s identity, especially those that are less correlated with the others, will in turn promote long-term wellness.
Some risks to self-identity are cannot be eliminated through diversification, such as the inevitable process of aging. This will impact one’s self-image no matter how many hobbies they take up. Nevertheless, increasing self-complexity can go a long way towards boosting self-esteem and promoting alignment with others who bring out your best.
I believe the parallels between portfolios and people run deeper than what is immediately obvious, and begs the question: what will you invest in next?
