There is a natural tendency for things to become increasingly adapted to their environments and with this adaptation to be more and more successful. These successful entities (organisms or companies) grow larger and larger – until.
Until the environment changes. There is a trade-off between specialization and adaptability. The more successful an entity is in one environment, the less successful it will be in another. The bigger the “bet” you make the better you do when it works, but the worse you do when it doesn’t.
The sweet spot is somewhere in the middle. You never want to go “all in” on the current environment, but neither do you (probably) want to maintain perfect flexibility.
This applies to career choices as well. One of the highest paid college degrees is petroleum engineer, one of the lowest is liberal arts (but philosophy majors do better than you might think). But what if the world changes? Again, there is a trade-off between specialization and breadth. The petroleum engineer’s career is high return and high risk like a stock portfolio, a liberal arts major is more like a bond portfolio, their career is likely to be (financially) unspectacular, but their downside is likely lower (given equal intelligence, etc. – I’m not sure the average liberal arts major has the same qualities as the average engineer, but in this analysis, I am assuming the same student merely selected one or the other and had the ability to be academically successful in either major). The best combination is probably a technical (STEM) degree with a minor in liberal arts. Or maybe a liberal arts degree with a technical graduate degree.
In portfolio construction, this means you overweight what has worked (equities, factor-tilts, etc.) but you always remember the future could be different, so you prudently diversify too (investment grade bonds, core holdings, etc.).
Probably the best way to hedge an unknown future is to use as little leverage as possible in your business, personal finances, etc.
People don’t seem to think enough about the possibility that the landscape can change. Survival of the fittest depends on the environment, being perfectly fit for an environment is better than fitness for lots of environments – until the environment changes. I would note that this overspecialization is a bigger risk for the young since the amount of future change that can happen is greater over a longer period.
Similarly, this article parallels how I think about financial planning and portfolio construction. Wealth management is an “infinite game” – survival is more important than getting the highest score. Thus, you should not (completely) optimize for the current situation because the current situation may not persist, and we don’t know in what ways it could be different.