Don’t Make Andrei’s Mistake

Doc’s note: When you calculate your net worth, what do you think of? Things you own like your investments, homes, and cars? If that’s all you’re considering, you might be missing some of your most important “assets.” Today, Kim Iskyan explains how you should really think of your net worth…


Your assets are more than your net worth: It seems like an obvious statement. But it’s missing some of your most important assets…

Your professional experience, education, and qualifications… The cultures you understand, the languages you speak, and the citizenships you hold… And your professional and social networks… All of these form part of your “personal asset base.”

They’re all essential to your future earnings power and financial-asset accumulation (not to mention, to who you are as a person).

But the way we usually talk about assets – and how we diversify them – suggests that we’re nothing more than a big walking, breathing dollar sign.

Sit down with a financial advisor, or crack open an Investment 101 textbook, and you’ll learn that diversification is all about putting your money into different baskets. Some money goes in stocks, some in bonds, a little in real estate, and a bit in precious metals. That’s it. We’re done.

Allocating capital to different asset classes reduces a portfolio’s overall level of risk. It’s a central tenet of portfolio management, and critical to the long-term preservation and growth of wealth.

But we tend to ignore the diversification of the “personal assets” that contribute to and create our net worth. That is, what got us our pile of cash – those other elements that make us who we are, and which we have to thank for our financial assets.

Here’s the problem: If your non-financial assets aren’t diversified – in a way that’s similar to how your financial assets are (or, should be) diversified – you could experience a similar problem as someone who puts 80% of his financial assets into a single stock.

That’s what happened to my Russian friend and former colleague Andrei.

Andrei’s Diversification Dilemma

Andrei worked with me at an investment bank in Russia in the mid-1990s. He was earning good money during boom times and had smartly ridden a rally in the Russian stock market. Andrei had some cash stored away in a local bank. He used some of his savings to buy a small apartment in the outskirts of town, which he rented out to earn some income.

By almost any financial adviser’s definition, Andrei was well-diversified.

He had put his eggs into several different baskets – stocks, bonds, real estate, and cash. By spreading his money out into different types of investments, he reduced his risk level.

Andrei made all the right moves with his investments, but missed a crucial step. While he diversified like a champ across different asset classes, he did everything within Russia.

And it wasn’t just his financial assets that were concentrated in a single market… It was a similar story for his “personal assets.”

Andrei grew up in Russia, went to a Russian university in the country, worked in Russian finance at a Russian bank. He spoke Russian (and passable English), held a Russian passport, and had a personal and professional network heavily concentrated in Russia.

In 1998, Russia experienced an economic crisis. Deep fiscal imbalances within the Russian economy – the government couldn’t pay its debt – triggered a currency collapse and broad economic crisis.

The Russian stock market collapsed 93% within months. The bond market was obliterated. The banking sector wobbled like a tent in an earthquake. Real estate prices fell by as much as half.

When the Russian economy sank like a lead balloon, it took Andrei’s financial assets – diversified, but only within a single market – with it.

But it was a lot more than that: The value of Andrei’s personal assets plummeted in value as well – that is, his ability to generate income (and financial assets) in the future. Overnight, the market for Russian banking professionals evaporated. The market value of living in Russia and speaking Russian collapsed. Andrei’s professional network – nearly all of it in Russia – was in the same position as he was, and couldn’t be of much help.

Andrei had diversified his financial assets… but only within Russia. And it was the same story for his personal assets.

Now, you might be thinking, “Emerging markets like Russia have crises all the time.” Andrei was juggling nitroglycerin while on a pogo stick by not diversifying outside of a volatile developing economy… and of course, he blew himself up.

But Andrei was just doing what investors all over the world do – and what people in developed markets do as well… He was simply putting the bulk of his assets in his home market.

And it was the same story with his personal assets. In some ways, that’s even worse. After a crisis, markets usually eventually recover. But if you’re stuck with bad “personal assets,” your ability to generate financial assets can be impaired for life.

And remember… Even large, developed markets aren’t immune to the kinds of crises that regularly engulf emerging markets. After all, it was just a bit more than a year ago that the S&P 500 plunged more than 30% in just a month… and for a while, it looked like life in the United States as we knew it was going to change forever.

It’s a mistake to think that major disruptions to both financial and personal assets can happen only in faraway developing countries. And they can be as damaging as what happened to Andrei more than two decades ago.

There are some simple steps you can take to avoid making the same mistake as Andrei. So keep an eye on your inbox tomorrow, when I’ll share my top three tips for diversifying your personal assets.

Best regards,

Kim Iskyan
April 20, 2021