February 2, 2009
For our entire lives most of us have depended on highly centralized systems. Our food comes from a thousand or more
miles away. Our savings is shipped into distant financial centers and invested by strangers in enterprises run by
strangers. We watch highly scripted news that serves the same spin no matter how many channels we try. We bank at
impersonal global banks with criminal records that would make a felon blush and have no idea where our money goes, just
that the government guarantees that we will get it back.
Within this centralized system, diversification means having your financial assets deposited into a “one-stop-shop”
brokerage account invested in securities representing different global industries, the idea being when one industry is
doing poorly, another “countercyclical” industry would be doing well.
But suddenly, we find that we may not be able to trust these centralized systems. Suddenly, traditional portfolio theory no longer addresses our anxiety. This is because we need to shift from diversification within a centralized system to
real diversification in a decentralized, possibly “out of control” world.
If you study the investment patterns of families and wealth that has survived through the generations, including through
periods of lawlessness and warfare, you come to understand that for those who want to thrive in all economic and
political scenarios, diversification has had a far deeper meaning than what is commonly understood in the financial
markets today. For the astute strategist, it means not putting all your eggs in one basket in every important aspect of
your life. Given what is happening in our world and economy, it’s time to revisit the deeper meaning of diversification.
Diversification means that our assets are invested such that an economic, political, or natural event — particularly a
catastrophic event — cannot wipe us out. So, for example, we don’t invest all of our savings in a single financial
institution or fund. Investors who lost their life savings in the Madoff scandal were not practicing even the most basic
form of financial diversification.
Diversification also means having multiple types of assets and custodians in multiple places. Custodians (i.e., those
who hold our assets for us) might be brokerage firms, banks, depositories or our own safe.
Diversification by place means locating our assets in states or countries subject to different legal and political
risks. It means denominating our assets in currencies of multiple countries. It means selecting assets subject to
different risks of loss due to climate change, weather conditions, social conditions and other uniquely local
vicissitudes. Local investment is a great idea, but the people who lived through Katrina can tell you why having all of
your eggs in one local basket may not be the best idea.
Diversification means that we don’t have all of our savings in just one type of asset. So we don’t invest in securities
only — we also invest in tangibles. If possible, we buy a house without debt, or with debt that can be serviced by one
family member’s income, or invest in our home to lower energy and food costs permanently. We also maintain a sufficient
inventory of household goods. And it’s a good idea to invest in disaster preparedness if we live in an area that
experiences earthquakes, floods, hurricanes, or tornadoes or are is prone to power outages.
Having all your money in one currency or one country is pretty risky – a risk many in the US tend to take. Ask your
Jewish friends whose parents got out of Germany in time because they had gold coins or family and assets abroad. Gold
coins may hold their value if the dollar collapses, but they can also disappear in a burglary or if you forget where you
put them. Digital gold may be a great thing, but if the Internet is not reliable where you are, cold cash may be a good
thing. Or if your cash is worthless, a stockpile of food, vitamins and liquor can be priceless. However, food, vitamins
and liquor are only good when you are bartering with someone who wants them or is close by. Which takes us back to gold
coins or digital gold or some other currencies. So you see, there is no magic bullet – just diversification.
Diversification of life risks is an integral part of all matters related to financial capital. Living things are the
source of all wealth. That includes you and me.
Diversification means that we invest in our physical and mental well-being. We invest our time in understanding the
toxic chemicals, drugs and other influences that increasingly contribute to poor health and cause us to need so much
more funding for more drugs and medical treatments to cure what ails us. One of the greatest – and growing — threats to
our financial health is physical illness. The notion that corporate stock investments will create security while one
saves money eating unhealthy food is contradictory to the principles of building real wealth.
Diversification means that we invest not just in our own human capital but also in the human capital of other members of
our family and those around us. In this way, we are not betting on financial assets alone to see us through. We are
investing in each other because it is family, friends and communities that help see us through. An active network of
mutually-supportive friends and colleagues is important. For those with sufficient capital and skills, financing the
farmers and companies we depend on for our daily bread may not provide much of a return — it may, however, ensure that
we have healthy, safe food.
Diversification also applies to the work we do. For most people, our labor is our most important source of financial
assets. Skill diversity can mean, for example, that you have a number of skills. If one skill goes out of favor, another
will give you the ability to be economically useful. If you have a business that fails, you have the ability to start a
new business because you have the experience and diversity of skills to make a business run.
The ability to generate income through your own business or practice is invaluable, particularly when the economic
environment makes “W-2” employment more difficult to find. If you are an employee and your company closes, if you have
taken care to broaden your skill base, your skills can be valuable commodities for other, different types of employers
or employers in other industries or places less affected by a downturn. Better yet, you know how to do many things for
yourself, thus offsetting lost income with lower expenses. Look at those who are successful in the current environment:
what most of them share is a commitment to life-long learning that translates into a multitude of personal and
professional skills.
Diversification is not always easy to achieve. The more resources we have, the easier it is to diversify. The fewer
resources we have, the more our diversification focuses on building our human capital and community. Interestingly
enough, many of the best opportunities before us are those that can happen when people who have a lot of money and
people who don’t have money but have a lot of skills become allies in building greater diversification together.
Isolation shrinks our options. Opportunities expand as we organize and collaborate effectively. Hence, it is critical to
not assume financial capital can provide sufficient diversification alone and remain isolated from our neighbors and
family.
One of my goals for the Solari Report is to explore options we have to strengthen and diversify our human and financial
capital and to introduce you to leaders who are taking action to help us do so.
On our next Solari Report, during our “Movers and Shakers Interview,” we will talk with permaculturist Albert Bates (see also: http://www.thegreatchange.com, http://peaksurfer.blogspot.com) about strengthening our communities, including eco-villages and Transition Towns. Albert and I will discuss financial permaculture as well. If the need is growing to shift money out of centralized
systems and reinvest in communities, there is an opportunity for those who can help us figure out how to make such
investment sound, liquid and profitable. To get you thinking, check out the new video on the first Financial Permacuture Summit.
In “Let’s Go to the Movies,” we will be taking about Avi Lewis and Naomi Klein’s documentary The Take about the economic collapse of Argentina and how workers responded to bring the economy back to life. If you want a
birds-eye tour of what can happen when your financial system and currency collapse, here it is.
In “Money & Markets” I will be reviewing recent financial events and discussing indications that more and more people are concerned
about a financial coup d’etat these days.
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Mapping The Real Deal is a column on Scoop supervised by Catherine Austin Fitts. Ms Fitts is the President of Solari, Inc. http://www.solari.com/. Ms. Fitts is the former Assistant Secretary of Housing-Federal Housing Commissioner during the first Bush Administration, a former managing director and member of the board of directors of Dillon Read & Co. Inc. and President of The Hamilton Securities Group, Inc.
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