Are You Really Diversified?

Perhaps you’ve heard at one point or another that when it comes to investing, diversification is a good idea. It makes sense not to put all of your eggs in one basket, and if you spread your wealth across different asset classes and geographies, maybe you’ll avoid the potential catastrophic risk that can come with just a single investment.

But it’s also possible to have too much of a good thing—or believe that you’re diversifying when you’re really not.

You might think that having a large number of investments in your portfolio makes sense and that the more you have, the more diversified you are. But thinking that way might be a mistake. Having many different investments may 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 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 simply a large, inefficient index fund that’s chock-full of overlapping, unnecessary investments.

So 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 You might have pieces of an outdated asset allocation, a fund left over from the dot-com era, or some shares of a company that you’ve been hanging on to just because you like it. Is there anything wrong with that? Maybe not—you just need to know what you’ve got.

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 into something perhaps more efficient, manageable, and understandable.

So even though it’s still the middle of winter, right now might be a great time to do a little spring cleaning with your portfolio. Give us a call; we’re happy to help.

Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed. Diversification does not guarantee a profit or protection from loss.

No client or prospective client should assume that the information contained herein (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group, its investment adviser representatives, affiliates or any other investment professional.

Raymond J. Lucia Jr. is chairman of Lucia Capital Group, a registered investment advisor and CEO of its affiliated broker-dealer, Lucia Securities, LLC, member FINRA/SIPC. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.

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