The Taxable Investor's Manifesto

CHAPTER TWODiversify at the Right Time and in the Right Way

Most people think of “diversification” as a financial investment strategy – what percent of stocks, bonds, hedge funds, private equity, venture capital, and real assets should comprise an investment portfolio? But before any of us has the opportunity to think about this aspect of diversification, first we have to accumulate wealth. That almost always requires long-term, concentrated investments of effort and capital. This chapter explains how and when to turn concentrated wealth accumulation into cash for potential reinvestment into that diversified portfolio of financial assets.

Most talented, ambitious people start their professional lives with minimal assets, often some debt, minimal earnings, and lots of earning potential. You can think of that earning potential as a large but intangible asset. Over time that intangible asset changes form. Earning potential converts into actual earnings that can be used to eliminate debts and pay living costs. Whatever earnings are left over convert into savings – a tangible asset.

In addition to receiving salaries, some people are compensated with concentrated ownership in one company through stock, restricted stock, and stock options. Equity in this form can offer great benefits for entrepreneurs, leaders, and managers in growing companies, but it isn't very liquid, and its value will follow the company's fortunes. In other words, it's risky.

In professions like dentistry, teaching, ...