“I’m diversified because I have a ton of accounts”, a financial advisor hears a new prospect say.
The potential client elaborates:
- Two checking accounts and a savings account at Bank of America
- Four accounts at Capital One (which the prospect can’t remember what kind they are)
- Two CDs at JP Morgan Chase
- A checking account, savings account, and IRA certificate at a local credit union
- Four retirement accounts scattered across various institutions:
- One self-managed account at Schwab
- One work-related account at Fidelity
- One advisor-managed account at Edward Jones
- Several beneficiary IRAs at Merrill Lynch, inherited from parents
- Two annuities purchased from an old friend over the past few decades
Makes me think CNBC’s Jim Cramer is going to pop out and launch into his old segment ringing bells and announcing loudly, “Am I diversified?”
Answer: No.
At least this is not enough information to determine if you are. In fact, you may just end up confused with so many accounts! As my team member mentioned the other day, this is an easy misconception that people can make.
To determine your level of diversification, one must examine the types of investment positions you hold. Many times—even with a variety of ETF or mutual fund investments—different securities can often be invested in similar or even identical assets.
Morningstar quotes acclaimed investor Howard Marks defining diversification this way: “Intelligent diversification means not just investing in a bunch of different things, but in things that respond differently to the same factors. In a well-diversified portfolio, something that negatively influences investment A might have a positive and offsetting influence on investment B.”1
So, when is the last time you found out if you were diversified? If you need help, reach out to us.
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Source:
1. Quoted in “What no one tells you about Diversification” by Larissa Fernand on December 14, 2022. Accessed online: https://www.morningstar.in/posts/72171/what-no-one-tells-you-about-diversification.aspx