How to Safeguard Your Income

How to Safeguard Your Income

 I’m a big believer in diversification¹. Putting all your eggs in one basket is dangerous, especially in your personal finance. Diversification is a good way to reduce your risks. The question is how we should go about diversification. Recently, through a lecture by Professor Robert Shiller, I got a deeper understanding of diversification.

In the lecture, Professor Shiller explained that risk – in mathematical terms – is represented by variance², which is a measure of how fluctuating something is. Potential return, on the other hand, is represented by average. An investment could have a high average (that is, high potential return), but if it also has a high variance (that is, highly fluctuating) then it’s risky³. Yes, you might get a high return, but there is also a chance that you would lose big. The ideal, of course, is to have a high average and a low variance.

Now I’d like to focus on the risk side of things. To minimize risk, what you need to do is minimizing variance. And the way to do that is by diversifying⁵ your portfolio⁶. But there is one important condition: the components⁷ must be independent of each other. That is, the fluctuation⁸ of one investment must not have any effect on the other investments in your portfolio. If you can meet this criterion, then you just need to keep adding new investments to your portfolio and you’ll reduce your risks over time.

Applied⁹ to personal income, it means that you should diversify⁴ your income streams in such a way that they become independent of each other. If you don’t do that, then you don’t actually reduce your risks.

Based on this understanding, there are four levels of income diversification (from the worst to the best):

1. You have only one income stream

This is the worst situation to be in. When something bad happened to this sole income stream, the effect will be devastating¹⁰. An example of this is salaried employees with no other income stream. If they lost their jobs, their entire income would disappear.

2. You have more than one income streams, but one of them dominates

This is better than level 1, but the effect will still be bad if something happened to the main income stream. The majority of the income will be gone, but the good news is that some of it will remain intact.

3. You have relatively¹¹ balanced income streams, but some of them are dependent on each other

Here you have several income streams and none of them dominates. This is good, except for one thing: since some of them are dependent on each other, they could all go down at the same time.

4. You have relatively balanced income streams, with no dependency between them

This is the best situation to be in. Here, when something bad happened, you will be able to keep going and suffer only minor¹² damage.

Here is a good question to ask yourself to guide you in your diversification effort: What is the worst single point of failure that would be devastating to your income?

For some people, it’s losing their job. For me as a blogger, it might be getting deindexed by Google (since a majority of the this blog’s traffic comes from Google). For a business owner, it might be losing a big customer.

What is it for you?

After you have the answer, you should work on minimizing its impact. Your goal is to diversify your income streams in such a way that there is no single point of failure that could devastate¹³ your income.

It might take years before you reach that point (I’m still working on it myself), but I believe it’s an important journey to take. And since it might take years, you’d better start soon.

1 diversification   

n.变化，多样化；多种经营

参考例句：

• The seminar was to discuss diversification of agriculture. 该研讨会讨论的是农业多种经营。 来自辞典例句
• Firm diversification is increasingly achieved by the means of takeover and merger. 通过接管和兼并，厂商经营范围日益多样化。 来自辞典例句

2 variance   

n.矛盾，不同

参考例句：

• The question of woman suffrage sets them at variance. 妇女参政的问题使他们发生争执。
• It is unnatural for brothers to be at variance. 兄弟之间不睦是不近人情的。

3 risky   

adj.有风险的，冒险的

参考例句：

• It may be risky but we will chance it anyhow.这可能有危险，但我们无论如何要冒一冒险。
• He is well aware how risky this investment is.他心里对这项投资的风险十分清楚。

4 diversify   

v.（使）不同，（使）变得多样化

参考例句：

• Our company is trying to diversify.我们公司正力图往多样化方面发展。
• Hills and woods diversify the landscape.山陵和树木点缀景色。

5 diversifying   

v.使多样化，多样化( diversify的现在分词 )；进入新的商业领域

参考例句：

• Some publishers are now diversifying into software. 有些出版社目前正兼营软件。 来自辞典例句
• Silverlit is diversifying into new markets, such as Russia and Eastern Europe. Silverlit正在使他们的市场变得多样化，开发新的市场如俄罗斯和东欧国家。 来自互联网

6 portfolio   

n.公事包；文件夹；大臣及部长职位

参考例句：

• He remembered her because she was carrying a large portfolio.他因为她带着一个大公文包而记住了她。
• He resigned his portfolio.他辞去了大臣职务。

7 components   

（机器、设备等的）构成要素，零件，成分； 成分( component的名词复数 )； [物理化学]组分； [数学]分量； （混合物的）组成部分

参考例句：

• the components of a machine 机器部件
• Our chemistry teacher often reduces a compound to its components in lab. 在实验室中化学老师常把化合物分解为各种成分。

8 fluctuation   

n.(物价的)波动，涨落；周期性变动；脉动

参考例句：

• The erratic fluctuation of market prices are in consequence of unstable economy.经济波动致使市场物价忽起忽落。
• Early and adequate drainage is essential if fluctuation occurs.有波动感时，应及早地充分引流。

9 applied   

adj.应用的；v.应用，适用

参考例句：

• She plans to take a course in applied linguistics.她打算学习应用语言学课程。
• This cream is best applied to the face at night.这种乳霜最好晚上擦脸用。

10 devastating   

adj.毁灭性的，令人震惊的，强有力的

参考例句：

• It is the most devastating storm in 20 years.这是20年来破坏性最大的风暴。
• Affairs do have a devastating effect on marriages.婚外情确实会对婚姻造成毁灭性的影响。

11 relatively   

adv.比较...地，相对地

参考例句：

• The rabbit is a relatively recent introduction in Australia.兔子是相对较新引入澳大利亚的物种。
• The operation was relatively painless.手术相对来说不痛。

12 minor   

adj.较小(少)的，较次要的；n.辅修学科；vi.辅修

参考例句：

• The young actor was given a minor part in the new play.年轻的男演员在这出新戏里被分派担任一个小角色。
• I gave him a minor share of my wealth.我把小部分财产给了他。

13 devastate   

v.使荒芜，破坏，压倒

参考例句：

• A few days before,a fire had devastated large parts of Windsor Castle.几天前，温莎城堡的大部分被一场大火烧毁。
• Earthquakes can also cause tsunamis,which devastate coastal regions.地震还引发海啸，它直接破坏海岸地区。