The Compound and Friends - Why Diversification Works in Life and Market (Tadas with Dr. Brett)

Starting point is 00:00:00 Hi, Brett. It's Taddis. Hi, Taddis. Hey, I'm on the line with Dr. Brett Steenbarger, who is a trained psychologist, trading coach, author, and blogger at the Trader Feed blog. I asked Dr. Brett Ontay to discuss a recent post of his entitled, Why Diversification Works in Life and Markets. So we're all familiar with the concept of portfolio diversification, but what about life diversification? In Dr. Brett's professional life, he has worked with doctors, medical students, and hedge fund traders, none of which are particularly well known to have well-balanced lives. So I figured that was a good place to start. Dr. Brett, what prompted you to apply the idea of diversification to our broader lives? Well, by seeing so many traders and so many

Starting point is 00:00:42 investors who are not diversified in their personal lives. You know, Tadis, all of life is a portfolio. We hold many different assets in our lives, relationship assets, career assets, personal interests. And the goal of diversification is to have enough of a balance among those so that we can maximize our overall well-being. Well, I think that, I think one of the important aspects of that is that it recognizes that, you know, life is a challenge for all of us and whether, you know, we all undergo difficult periods, like you said, whether it be professional, personal, emotional, physical, and having, like you said, whether it be professional, personal, emotional, physical,

Starting point is 00:01:31 and having, like you said, some balance between those gives you some opportunity to, you know, kind of ride those waves, as it were. That's right. And you know, Thomas, it's interesting, there's a romantic notion that the successful person is someone who is, quoteunquote all in in what they do. They have a passion for what they do and it means everything to them and they pour themselves into it and that's all well and good. But I've seen the downside of that where being so concentrated in one's activities ends up neglecting other areas of life. And it's one reason why so many portfolio managers and so many traders I work with have very troubled relationship lives. No, I think that's, you know, I think that's absolutely the case. And I think, you know, certainly from the perspective of, and you can see why that might be the case,

Starting point is 00:02:21 if you are managing somebody else's money and have taken on that responsibility, there's almost this need or this feeling that you have to exert yourself to a maximum sort of effort to make that relationship work, as it were. Great point. It's often the most diligent people who suffer the most that way. You know, if you're a global macro portfolio manager, markets are never really closed. You know, after the US, there's Asia and Europe, and there are things going on across various asset classes. So many of the folks I know, in order to stay on top of what they do, they get up multiple times at night and check their phones and check where prices are at. And that takes a toll over time.

Starting point is 00:03:13 No, absolutely. It prompted me to think of something, and I can't remember where I was reading it. I was reading something about some of the, I think they were looking at Nobel Prize winners in various sciences and noting how that many of them had, for lack of a better term, significant interests outside of the sciences, whether it be music or art or other things where, you know, for lack of a better term, a hobby. And I thought that was interesting in the sense that having an outlet or having another area kind of creative outlet provided them, you know, potentially some benefits when it came to their professional lives. That's also a really good point that having that

Starting point is 00:03:50 diversification not only rests us and renews us, but could actually inspire us to greater things in our primary work. And you're absolutely right about the creative potential. If we have experiences across a variety of areas of life that we can draw upon, that provides us with more material, so to speak, for understanding other investors, markets, and so forth. So it's not unusual, for instance, that I will find successful portfolio managers who have creative interests, who have a strong relationship interest, and those relationship skills and creative skills help them deal successfully within the industry. You know, how much of this is part of this simply an awareness problem?

Starting point is 00:04:46 In the sense that, you know, I think this idea of diversification and balance, I think, is important. But I think there are some times in our lives, whether it be, let's say, being a medical student or a resident, or, for example, let's say you're a professional and you have young children. There are simply some times in life when balance isn't technically feasible. And how much of it is just being aware that you're in that sort of period and recognizing that and noting it? Yeah, I think that is important. But I think there are creative ways of finding the balance, even in those situations. You know, I teach at a medical school in Syracuse. I work with medical students. I work with residents. And it's amazing how they find creative ways of dealing with their coursework and their clinical challenges.

Starting point is 00:05:35 So for instance, a group of medical students I worked with a while ago would get together at a popular grocery store that had a large food court, it's called Wegmans, and they would study together and turn the studying, and sometimes all-night studying, into a social experience. They would help each other study, they would quiz each other, they'd keep each other awake, they supported each other. So they found some diversity and diversification even within being immersed in their coursework. I think the same thing can be true for professionals with young kids. When my children were younger, I would come home and I would be very tired.

Starting point is 00:06:16 But one of our favorite activities was to go to the playgrounds, go out and have a bite to eat. I would take them out of the house, give mom a rest. And that was invigorating. It initially took energy to go out and do the things, but it gave energy in terms of enjoyment. No, I think that makes perfect sense. And another aspect of it, which I was thinking about before the call, was this idea of how our perceived happiness changes over our lifetimes in the sense that, you know, it's kind of oftentimes called this happiness smile, the idea that happiness ebbs as we kind of approach and are in middle age and then begins to increase once again. I'd be curious to hear your thoughts as to that idea and how this idea of diversification might assist in that. Yes, and you know,

Starting point is 00:07:07 Thomas, that the research literature in psychology differentiates between quote-unquote happiness and fulfillment. In other words, happiness is what makes us happy. It's what we do for fun and enjoyment. Fulfillment is what we find to be meaningful, that which accords with our values. And so I do think that there can be limited time available for some of the fun activities, some of the happiness activities at different points in life. And yet there can be a variety of activities that are fulfilling and meaningful and in their own way add to our total psychological well-being. Oh, no, that's, you know, that's, no, that's a really interesting point. And, you know, I guess in terms of coming to a conclusion, you know, I think one of the,

Starting point is 00:07:58 you know, one of the challenges that investors face, like, is this, you know over focusing on the markets and i guess for somebody who's a non-professional is there is there some insight or something to think about in terms of uh kind of putting into balance this idea of over over over indexing on what the market's doing on a day-to-day basis and uh kind of a broader perspective yes and particularly for investors i mean if you're a day trader it's one thing to be focusing minute to minute an hour to to day basis and kind of a broader perspective? Yes. And particularly for investors. I mean, if you're a day trader, it's one thing to be focusing minute to minute, hour to hour on what markets are doing. But as investors, you really need to have longer term plans and you need to be aware of portfolio construction. This recent period in markets that we've seen where we've seen

Starting point is 00:08:42 some dramatic moves, both in fixed income and in equities, is a great example. Someone with a balanced portfolio between those asset classes has fared much better than someone who is overly invested simply in equities. But what I recommend to traders and investors, portfolio managers, is that they focus on the main sources of well-being and draw upon those at least on a weekly basis. Those would be happiness, the things we do for fun. Those would be fulfillment, the things we do that are meaningful to us. It would include energy, things that give us energy. It could be our intellectual stimulation, could be physical energy, as in working out, and relationships,

Starting point is 00:09:30 being close to people who matter to us. And if you can imagine hiring on all four cylinders every week and structuring your life so that you do that, I think you're most likely to have a diversified life that can help you weather the storms of markets and life itself. Well, that's a great place to stop there. I appreciate you taking the time, Dr. Brett, and we'll talk to you again soon. I look forward to it, Thomas. Thank you so much. Thank you.

The Compound and Friends - Why Diversification Works in Life and Market (Tadas with Dr. Brett)

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