#314 The Diversification Mistake High Earners Keep Making ft. Peter Kim, MD

The Wake-Up Call

March 2020 was a reality check for a lot of investors, including Peter. He watched his entire portfolio move in the same direction at the same time. Stocks were down. Real estate was under pressure. He had thought he built something diversified, but when the pressure came, it became obvious he hadn’t. That experience stuck with him and started pushing him to think harder about what diversification actually means, not just as a word, but as something that holds up when things get rough.

He noticed a pattern that tends to repeat itself with high-earning physicians. Most of them stop at the most surface level of diversification. They own some stocks, they own a little real estate, and they call it done. That setup looks diversified on paper, but it doesn’t behave that way when markets get stressed. Peter saw that same thing happen in 2020 and says he’s watching similar patterns show up again today, especially in commercial real estate, where different property types that were supposed to move independently are moving together.

The whole episode comes out of that observation. Peter wants to give physician investors a cleaner, more honest way to look at what they’ve actually built. Not to overwhelm anyone, but to find where the real gaps are before those gaps become expensive problems.

Ray Dalio’s Holy Grail and the Gap Most Physicians Face

Peter brings up Ray Dalio, the founder of one of the most successful hedge funds in history, and Dalio’s concept of what he calls the Holy Grail of investing. The idea is that if you hold enough truly uncorrelated assets, meaning assets that tend to move in different directions, you can dramatically cut your portfolio risk without giving up much in returns. Dalio puts the magic number at around 13 to 15 uncorrelated assets.

Peter’s honest about his reaction to that number the first time he heard it. He was impressed, but also overwhelmed. Most physicians he knows, including himself at various points, are sitting with maybe two or three different investments that aren’t moving in lockstep. Nowhere near 15. And finding that many truly uncorrelated assets is hard. It takes bandwidth that most doctors working clinical schedules just don’t have.

So instead of chasing that number, Peter says the better move is to get more intentional within the asset classes you already have. Stop assuming that just because you own two different things, they’re actually behaving independently. That’s the whole reason he built out the six dimensions framework. It’s a more practical way to map where you actually stand.

Asset Class and Correlation

The first dimension Peter walks through is asset class, and he goes deeper than most people do with it. Yes, stocks and real estate are different asset classes. That part everyone knows. But inside each of those categories, there’s a whole internal structure that most investors don’t think about. Within equities, you’ve got domestic, international, large-cap, small-cap, growth, value, and different sectors. Real estate works the same way. Multifamily, industrial, self-storage, medical office, retail, hospitality, mobile home parks. Each one responds differently to interest rate cycles, employment trends, demographic shifts, and consumer behavior.

He points to some clear examples of that. Multifamily held up relatively well in 2008 because people still needed places to live even as other sectors were collapsing. Retail got hit hard. Industrial and self-storage had long runs over the past decade, driven largely by the growth of e-commerce. Medical office is driven by a completely different set of forces than any of those. His point is that if everything you own is multifamily in one market, you’re a lot more concentrated than the label “real estate investor” suggests.

The second dimension is correlation, and March 2020 made this one real for a lot of people. Correlation measures how much two assets actually move together. The problem is that correlation is not static. Assets that look uncorrelated in normal conditions can suddenly start moving in the same direction during a crisis, when liquidity dries up and sentiment shifts. Peter says normal market correlation is less useful than what he calls stress correlation, and that’s the thing worth paying attention to when you’re evaluating your portfolio.

Liquidity, Time Horizon, and Tax Treatment

Dimension three is liquidity, and Peter thinks it doesn’t get enough attention from physicians. The difference between a publicly traded stock and a real estate investment is stark when you actually need capital. You can exit a stock position in a day. A real estate syndication might lock you in for five to seven years. That’s not automatically a bad thing. You’re often compensated with better returns for that illiquidity. But the real question is whether your assets are liquid at the right times for your life. If you’re thinking about a career transition, a sabbatical, retirement, or a major business investment in the next few years, that needs to factor into how much of your portfolio is locked up and for how long.

Dimension four is time horizon, which is closely related to liquidity but distinct. It’s about matching your investments to when you actually need the money to work for you. A long-term real estate fund with a 30-year hold serves a completely different purpose than capital you’re planning to redeploy in 18 months. Both can fit inside a well-constructed portfolio, but treating them like they’re interchangeable is how you end up with a mismatch between your investment structure and your actual life goals.

Dimension five is tax treatment, and Peter says this is the one where physicians pay the most attention, for good reason. The after-tax return is the real return. A real estate investment that generates passive losses and depreciation looks very different on paper than one that doesn’t. He pushes listeners who haven’t sat down with a CPA who works specifically with physician investors to make that a priority. A lot of doctors are optimizing for returns before tax, then leaving money on the table when it comes to what actually stays in their pocket.

Geography and What to Do Next