Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday- in the hopes of using it as an educational tool alongside the memos I write to teach them about the world and to have a shared activity to work on together as they grow up.

Here is the performance so far from the first five months:

‌‌Month #1, August 2020: $ARKK +57%

Month #2 September 2020: $ARKG +58%

Month #3 October 2020: $BTC.X +156%

Month #4 November, 2020: $BTC.X +65%

Month #5 December, 2020: $NVDA -1%

One of the main purposes of this portfolio is to use the different holdings as conversation pieces to teach my future kids about the world.

While talking to Justin Gage (@itunpredictable) this week I realized I'm missing a holding that I will likely want to make conversation #1 with a kid who is just beginning to learn about investing and the markets.

And that is company-specific risk.

I like this portfolio because it forces me to look at the world with the eyes of a kid who literally knows nothing. When you don't know anything- everything is a much bigger risk.

And one of the biggest unnecessary risks is company-specific risk, which just refers to any risk that a particular company could face, from increased regulation, more competition, to just plain old bad luck, like a storm that disrupts your supply chain, or the brilliant CEO gets really sick and has to step down.

A lot of company specific risk is unpredictable. And by definition, it is just a risk to the one company you're looking at.

But there is a way to mitigate company-specific risk, and that is to invest in multiple companies. That way, if something bad happens to one company, it is not detrimental to your portfolio, because the other companies weren't negatively affected by that same risk factor.

This is an argument for diversification- the idea that you should put money in many companies, so that no one company's downfall can make that much of a difference to your overall wealth.

The flip-side though is that no single company performing extremely well will move the needle much for you either.

While I tend to think that there is a healthy balance to be found (a portfolio of say 20 stocks is a good amount of diversification, 100 limits your upside, 2 exposes you to too much risk), there is a lot of research that has been done that points toward the fact that any outperformance in excess of the broader market performance is due to luck rather than skill. (87% of all US fund managers underperformed the broad S&P Composite 1500 Index since 2005.)

While I personally believe that expertise and research can allow you to outperform based on your efforts, I would still want to introduce the ideas of diversification and luck to my future kid, and let them think for themselves.

So that is why this month, my investment that will trigger this conversation is:

Vanguard Total World Stock ETF ($VT)

$VT is basically a tiny piece of every company in the world. You've totally diversified out any company specific risk. Your risk is the overall market risk.

I think for a kid, that's a really good way to get introduced to investing, in contrast to options, gambling, and trying to make a quick buck.