Lord Voldemort was the unrecognized Suze Orman of the Potterverse. The man could’ve poured his money into nasal reconstruction surgery, yet instead he saw the value in diversification, making himself harder to kill by spreading his assets out among multiple Horcruxes.
You may not be a wizard, ‘Arry, but today you’re going to learn something about personal finance from He Who Must Not Be Named. For while we’ve already established that the good guys of J.K. Rowling’s seminal masterpiece are fucking idjits when it comes to money, the Dark Lord himself is another matter.
The principle of Horcruxes—dividing Voldemort’s soul into multiple containers so that he could only be killed when all of the Horcruxes were destroyed—is a pretty damn clear analogy for financial diversification.
Diversification, just like the dark magic of Horcruxes, is a strategy for risk management. The idea is to spread your money out into a variety of different investments and savings vehicles to lessen your overall risk should one or more of those investments go the way of Tom Riddle’s diary. Diversification generally helps you yield higher financial returns over the long term and wraps your financial future up in layers of safety you won’t get from sticking 100% of your net worth in a checking account.
You know: exactly like Voldemort’s Horcruxes.
What is a Horcrux?
“Um, what does this mean? What if I don’t get Harry Potter references?”
Were you born in a barn?! A barn that existed either before 1983 or after 2005?!
Ugh. Fine. For the olds: It’s just like how Morgoth imbued his essence into the fabric of physical reality. Even though the Valar thrust him into Outer Darkness, he can’t be truly defeated until Eru returns to remake the world. At least you would know that if you weren’t too busy cruising around in your Ford Cortina smoking Tareyton 100s from a vending machine to read a damn book!
For the younglings: It’s just like how Obsidian can’t really be killed—she can only be poofed back into Ruby, Sapphire, Amethyst, Pearl, and Pink. Now for the last time: stop bush camping and go to bed!
Ugh. Troglodytes. Back to my metaphor!
Risk tolerance
“The stock market is risky! I’m scared of losing my money! Why can’t I keep all my Sickles and Galleons in Gringotts where they’re safe?”
Because tucked away in that goblin vault, your gold will also be completely safe from compounding interest. There it’ll sit, gathering dust yet depreciating in value until that giant pile of gold is worth less than when you deposited it.
The only way to escape depreciation and keep up with inflation is by making your money work for you. In other words, by earning interest. And the best way to do that is through investing, whether it be in the stock market, property, or another long-term investment vehicle.
Sure, it’s risky! So was Dumbledore’s decision to bow out of the fight and entrust the fate of the wizarding world to a known traitor and a teenage boy! But it worked out pretty well with the half-blood Prince and the Boy Who Lived in the end, didn’t it?
Thus, with your diversified investments. No risk, no reward as they say.
Multiple investments
“Fine. I’ll put it all in my 401(k) instead. Gringotts be damned!”
Hold on there, Godric Gryffindor. There’s something about eggs and baskets you should be warned about.
If the stock market tanks (and it will, because as we all know the stock market goes through natural fluctuations over time and recessions are generally inevitable), that’s it for you. You’ve got all your money invested in a single financial Horcrux, and the loss of that Horcrux is all it’ll take to kill you off. Harry’s story would’ve ended at the Chamber of Secrets if Voldemort had been so shortsighted.
So this is exactly where diversification comes in.
Multiple financial Horcruxes with different terms and advantages will help shield you from ruin should one of them find itself on the wrong side of the Sword of Gryffindor. It’s most helpful if your Horcruxes respond in opposite ways to fluctuations in the market, so that when one responds negatively to those fluctuations, another will respond positively, or at least not disintegrate entirely.
For example, investing in some foreign stocks and some domestic stocks is safer than investing entirely in one or the other.
On a much simpler level, keeping an emergency fund in a high yield savings account while also investing in an index fund will ensure you still have liquid assets should some upstart Hogwarts student or a recession wipe out your full-time job and your investment returns.
For that matter, the whole concept of an index fund operates like thousands of tiny Horcruxes, spread out across the stock market. If you’re looking to mitigate the risk of investing, an index fund is basically Deatheater-approved!
How to diversify
“Ok, so I’ve got my Gringotts savings account and stock in Madam Malkin’s. Happy now?”
Not quite. Let’s set you up with multiple investing vehicles, a CD, and some property too.
The Burrow might look like a towering building code violation, but it’s actually the Weasley family’s biggest asset. When it was inexplicably burned in the movie (TRIGGER WARNING FOR DIVERSIONS FROM CANON), they were glad they had their other assets divided between Mr. Weasley’s government pension and the Roth IRA Mrs. Weasley had been contributing to for years. (Also insurance, that fine Muggle invention.)
These upstanding members of the wizarding community were using financial Horcruxes and they didn’t even realize it!
Most financial advisors discuss diversification solely in terms of investing. As you can see, I think we need to take it a step further. The stock market isn’t the only form of diversification you should be worried about.
He Who Must Not Be Named could’ve stuck with the glittering inheritances of the Hogwarts houses, but once the gang figured out they needed to destroy Salazar Slytherin’s locket, even Harry could’ve used deductive reasoning to track down Rowena Ravenclaw’s diadem and Helga Hufflepuff’s cup. Then the Dark Lord would’ve been all out of Horcruxes and running for his life. (Sidenote: Why aren’t these books titled Hermione Granger and Her Halfwit Pals?)
Instead, he chose a few unexpected Horcruxes. Who would ever have expected Voldemort to use a couple of living beings, Nagini and Harry himself, as Horcruxes? That’s some advanced Arithmancy right there.
I strongly believe insurance, savings accounts, and property count as diversification. Yes, you should invest wisely in multiple stocks and bonds. But those are still subject to market downturns. Insurance and savings work very well as financial Horcruxes because they’re designed to protect you when you suffer huge losses, whether of your job, your health, or your other Horcruxes.
The death of a financial Horcrux
Let’s say some recently glowed-up Neville Longbottom comes out of nowhere brandishing a sword at your pet snake. Sure, it’ll be painful to lose that Horcrux. No denying that. But the death of one Horcrux won’t necessarily affect the others. You’re not dead broke yet!
In other words, you’ve still got gold in Gringotts, a roof over your head in the Burrow, and an investment portfolio full of exchange traded funds.
Shit happens. The stock market rises and falls. Housing bubbles burst. Medical emergencies, flooded basements, and job losses happen. Bespectacled boys somehow survive the worst the Dark Arts can throw at them.
It’s in light of all these tragedies and financial upsets that you’ll be glad you diversified. You’ll be glad you’ve not only invested in stocks and bonds, but that you have an emergency fund, a savings account, insurance, and a home. Each of these financial Horcruxes can stave off destitution while you recover from whatever loss or economic downturn destroyed your teenage diary.
I’ve only got one financial Horcrux!
If you’re freaking out right now because you’ve invested every last Sickle in Weasleys’ Wizard Wheezes, consider diversification in different financial Horcruxes a near-term goal!
You can begin by starting an index fund or moving your existing investments into such a fund, which will spread your investments across the entire stock market, rather than just one company’s stock. This way if Fred and George mismanage their business into the ground, you don’t lose it all.
Think ahead to the day your other financial Horcruxes might be in danger. Get insurance against the day your pet snake gets sick, start a high yield savings account so you don’t need to pawn that diadem when money gets tight, open a 401(k) and IRA so you’re not relying solely on your inheritance from Marvolo Gaunt to get you through retirement.
“Solid advice, Narcissa Malfoy. But I don’t have two Galleons to rub together, let alone enough to start investing in an index fund.”
This is another reason why I consider diversification important outside of the stock market. No matter how little you have to sock away, socking it away in different financial Horcruxes is still valuable diversification. If you’re storing all your savings in a cookie jar, move some of it to a savings account. If you’re relying entirely on an emergency fund to cover your next health crisis, get insurance.
These are reasonable ways to spread out the risk of something happening to one financial Horcrux, and they’re something you can slowly work up to when you’re broke or battling debt.
Learn from the wisdom of the Dark Lord. Make yourself hard to impoverish through the use of diversified financial Horcruxes.
Now enjoy this, the greatest homage to He Who Must Not Be Named ever created:
Like, like, like – this is like a love letter to us Potter fans out there. Nice work.
One question you left unanswered though, who our what does one have to kill to create a financial horcrux…
HH
YOUR DEBTS. Or a so-called financial advisor who is not actually a fiduciary.
From what’ I’ve read, Warren Buffet is not a champion of diversification. He recommended staunch research and ideally, selecting only 5-6 stocks in worthy, once-in-a-lifetime stocks. That’s why it’s value investing and not “just buy an index fund” investing.
“Diversification is protection against ignorance. It makes little sense if you know what you are doing.” – Warren Buffett
Oh shit son! Fact-checked! And here I thought if anyone took issue with the article it would be because I got a Horcrux fact wrong. At any rate, I’ll change it to Suze Orman, since I have heard her champion diversification.
That’s great if you know what you’re doing. Or you think you do. It will look like you do until you don’t. The beauty of diversification and index funds is that you don’t have to be lucky, just consistent. Did he actually say that? He was a proponent of diversification and it came as a shock even he Tenafly that he had significant position in Amazon.
See here: https://www.cnbc.com/2019/02/25/buffett-remains-bullish-on-index-fund-investing.html
Warren’s company beat the market nearly every year from 1970 to about 2008. But now it’s too large to outperform it, a return which would have doubled the company’s value in 1980 adds just .08% to its worth now. It’s harder to identify undervalued companies on that type of scale, too.
But for individual investors, there are still nuggets to be found.
Not “nearly” every year, but more often than not. In their worst years, they under-performed by almost 50%. Their advantage is largely driven by the early years, as well, during staglation. See here: https://www.theatlas.com/charts/S1mAAANEz
The question isn’t “whether they can beat the market”, but whether they can beat the market reliably over time after fees.
Sure, BH is larger now, but so are the market and GDP. You can’t compare nominal dollar values from 4 decades ago to modern prices. The SP500 is ~2900 today and was 119.80 on July 1 1980.
I think he was referencing that for a very small portion of people who are highly trained and/or experienced in that area. Most of us would not do well if he attempted what he does. In 2018 he said “consistently buy an S&P 500 low-cost index fund…I think it’s the thing that makes the most sense practically all of the time” and “The trick is not to pick the right company, the trick is to essentially buy all the big companies through the S&P 500 and to do it consistently.”
Love the Harry Potter references. In response to Anne – no one is Warren but Warren. The rest of us would do better to put our money in index funds with a little bit of diversity like the bitches say. 70% + of money managers don’t beat the market, why would us that don’t do this for a day job beat it?
Research is key, why you’d abdicate that only you can answer. But it does take time and research. If that’s all there is to it, if all you’re going to do is index fund, why are you here? Why bother?
Fun post. Two things to mention. For an equity class, there’s benefit (better expected returns) when you diversify up to about 30 individual equities (30 stocks is better than 20, but 40 is only a little better than 20). The benefit is never eliminated, so a total market index is a little better than an SP500 index, but they’ll be really well correlated.
Also worth mentioning that you should select products that are uncorrelated. An SP500 index will not diversify over a total stock market index, but a bond market index will.
And the benefit doesn’t just relate to financial ruin. You can expect higher returns (to a point) by diversifying with equities that have lower expected returns. So it’s more secure and better average returns.
Not sure how that fits into the Potter analogy though..
Sometimes it’s best to spell it out in plain language, sans Potterisms. Thank you so much for chiming in! This is an excellent point.
My kids love Harry Potter so I sent them this post to get them excited about personal finance! As a household, we diversify not just our paper portfolio but across paper, real estate and business investments. This gives us diversification across market conditions but also across skills and expertise required of the investments.
Speaking of Harry Potter, I used a Voldemort reference in my Forbes column years ago but on career advice, not personal finance: https://www.forbes.com/sites/work-in-progress/2011/08/02/does-voldemort-work-in-your-office/#a9995ea15c96
https://www.forbes.com/sites/karlkaufman/2018/07/24/heres-why-warren-buffett-and-other-great-investors-dont-diversify/amp/