Are You Really Diversified?

You’ve probably heard that diversification of your investments is a good thing. And it would seem to make sense that by keeping all of your eggs out of a single basket, and spreading your wealth across different asset classes and geographies, you may be able to avoid the catastrophic risk that often comes with just a single investment or two. 

And yes, that can be a good thing. But it’s also possible to have too much of a good thing – or to believe that you’re diversifying when you’re really not.  

More Isn’t Always Better

There’s a mistaken belief out there that having a large number of investments in your portfolio is always the best way to go, and that the more investments you have, the more diversified you are. But that might be a mistake, because it can create a false sense of confidence, making you believe that you’re well diversified when in reality, many of your investments actually share a common risk. 

The actual number of investments a portfolio has really tells us nothing about its risk-return profile. You could have a portfolio with 200 holdings that’s less diversified than a portfolio with just five holdings. It might seem counterintuitive, but, in some cases, by owning a little bit of everything, you may actually wind up owning nothing. In other words, all you’ve got is just a large, inefficient index fund that’s loaded with overlapping, unnecessary investments. 

Align Your Investments with Your Goals

If you’ve been a long-time investor, there may be a good chance that your portfolio contains elements of every fad, bubble, or idea that we’ve seen over the decades. You may have pieces of an outdated asset allocation, a fund left over from way back in the dot-com era, or some shares of a company that you’ve been holding onto just because you like it. Is there anything wrong with that? Maybe not—you just need to know what you own – and why. 

Having a comprehensive financial strategy may give you the context you need to decide whether the investments in your portfolio are aligned with your goals. The idea is to take what could be a jumbled mess of overlapping and redundant holdings and simplify it all into something perhaps more efficient, manageable, and understandable.  

So even though we’re not quite in the spring season at the moment, right now might be a great time to do a little “spring cleaning” with your portfolio. Take a look at what you have, see what may be still worth owning, decide if what you have is aligned with your goals, and reorganize.  This is exactly what we do with clients every single day, and if you need some help or guidance to determine what fits your current retirement goals, just give us a call; we’re here to help.