Diversification is an important aspect of investing used to manage risk. It’s all about not putting all your eggs in one basket. Most investors have a general awareness of this topic, but it can be tricky to know if your investment portfolio could use a bit more diversification or if you’ve overdone it. Is there a sweet spot? Let's talk about it.
Can I Have Too Much Diversification In My Retirement Savings?
We’re often told to diversify, diversify, diversify, but over-diversifying your investment portfolio is a risk. When over-diversified “Do it yourself” (DIY) investors come to us, here is what we see:
Confusion. This happens when your money is spread so thin over numerous investment pools that it becomes confusing. This can cause investors to forget about portions of their retirement savings. While sometimes we need to have a set-it-and-forget-it mindset, that doesn’t mean we shouldn’t be checking in on our money from time to time. This can also lead to analysis paralysis — when there is too much data to sort through that you simply do nothing because you don’t know where to start. Over-diversification can also make managing fees and costs tricky or cumbersome. While diversification is good, don’t overdo it. Our goal is to always provide the knowledge to our clients that eliminates confusion.
Too many mutual funds all investing in the same thing. Before partnering with us, many people have selected various mutual funds in their employer-sponsored retirement accounts. While it’s great that you’re putting those funds to work, do you know what you’re investing in? Without knowing it, you could own Apple stock in several different mutual funds. Think about the “Large-Cap Growth” fund you own in your 401k. Then you buy another company’s “Large-Cap Growth” fund in your IRA. While you may feel diversified since the funds are managed by two different companies there is a very good chance they are invested in the same stocks. While some overlap is often inevitable, understanding what types of businesses a fund focuses on can help you diversify.
Numerous Transactions. We want to warn you that it’s not unheard of for some financial advisors to conduct an unnecessarily large number of transactions by buying and selling similar stocks or funds. While your overall portfolio performance may appear fine, the result can be excess fees, high management costs, and extra dollars in your advisor's pocket.
At Integrated Wealth Management, we’re fee-only advisors and fiduciaries. This combination provides our clients with the piece of mind that there are no ulterior motives when it comes to investment selection. We charge a fee for our services, we are not commission-based like many other advisors.
Do I Need More Diversification in My Retirement Account?
More common than over-diversification, we see pre-retirees who may benefit from adding a bit more diversification into their investment strategy. If you’re only invested in a large cap mutual fund, you may be missing out on other opportunities.
It’s also important to think about the goal of each of your savings vehicles along with the timeline of your goals. For instance, your emergency fund savings may be fine in just a money market savings account — after all, you want to know it will be there when you need it. The savings account may not give you a large enough return to keep pace with inflation. Remember, the day you retire isn’t the end. You may still have another 20, 25, 30 or more years to enjoy and will need your portfolio to fund those years. Many will use various types of investment opportunities, stocks, ETFs, mutual funds, REITs and bonds to achieve their life goals. YOur goals and risk tolerance should drive your asset allocation.
It’s also important to remember your timeline. Many investors choose to be more conservative when retirement is near whereas a 20-something may be comfortable taking on more risk knowing more time is on their side. We recommend that a retiree’s “War Chest”, the safer portion of your portfolio, should hold at least five years of spending needs. This means if you spend $25,000 per year from your savings and investments that you should hold at least $125,000 in your “War Chest”. These holdings should be invested in money markets, CDs, short term bonds, or ETFs or mutual funds that invest in those investments…NOT STOCKS OR MUTUAL FUNDS OR ETFS THAT INVEST IN STOCKS.
Ignore the Wall Street Hype
There will always be financial gurus with their stock pick of the day encouraging you to ‘buy now’. As a general rule of thumb, we encourage you to remove the emotion when it comes to investing. Instead, we focus on a tried and true investing philosophy by adhering to the following principles:
Long-term focus. Market timing does not work. We focus on maximizing returns over time.
Disciplined investing. A clearly defined investment strategy can help guide you through market ups and downs without resorting to emotionally charged reactions.
Tax-efficient consideration. Proactive tax planning is key. Asset location and tax loss/gain harvesting are considered to reduce taxes and maximize returns.
Ongoing risk reduction. We rebalance portfolios to take advantage of “buy low, sell high” opportunities.
Efficient portfolio management. We strive to execute trades efficiently and select low-cost investments to keep expenses low.
Investment portfolios and financial plans must align. Investment recommendations are based on your goals.
Diversification is important, there’s no doubt about it. But at the end of the day, stand firm when it comes to your goals and remember your retirement timeline. This is how you come to an investment strategy that works for YOU. Ready to learn more about how we can help you put your money to work in achieving your retirement goals? Check our calendar and set up a time to discuss your future today.
About Integrated Wealth Management
Integrated Wealth Management is owned by Burt Hutchinson, CPA, CFP®. We’re a CPA-led organization, meaning we’re here to handle your complex tax scenarios and provide cost-saving insight related to your financial plan.
We’re here to guide you through the 3 stages of retirement:
Uncertainty Stage: When you are within 10 years of retirement and have questions about how to make it work
Stability Stage: When you have reached the financial milestone to retire comfortably and confidently
Reflection Stage: When you are looking to leave a legacy
We are also here to provide experienced, empathetic support during times of loss, such as the death of a life partner. You need confidence and a sense of security to enjoy retirement. As fiduciaries with a fee-only structure, we never receive commissions. Free of ulterior motives, you can be sure we’re focused on your goals.
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Disclosure Statement:
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax, or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website,Past performance is not a guarantee of future results.