How to properly diversify investments:

A theme I see with many investors is a misunderstanding of diversification.  This can take many forms, and creates poorly structured portfolios, and lead to overlap in securities.  In this post, I’ll highlight some examples of this in real life, and provide some general education on portfolio management.   Keep in mind that this post is general educational investment  advice, and not a specific recommendation, as every individual has a unique strategy based on their life needs.

First, here are the common issues I see:

• Investors only having a single fund in their entire portfolio

• Investors having 20-30 funds in single accounts

• No re-balancing strategy

Investors only having a single fund in their entire portfolio

This is a common example I see, typically with an investor owning only an S&P 500 Fund.  Yes this strategy has garnered solid growth over the past 20+ years, but other asset classes do outperform more often that investors realize.  Other asset classes such as Mid-Cap, Small Cap, International, Real Assets, and even bonds can help hedge against downturns in large cap stock and the US Market.  It also can be a stressful situation for a new retiree relying on a 100% allocation to the S&P 500 when the market drops significantly and unexpectedly.

Investors having 20-30 funds in single accounts

This issue I’ll address in more length as there are multiple issues here.  I also see this in professionally managed accounts as well, and the main issue here is overlap in actual positions.  

Diversification is not achieved by having multiple of the same positions!

Utilize tools such as this one to help review overlap in fund portfolios. I’ve included an example below of this tool comparing two popular ETFs:

More often than not, overlap in positions creates unnecessary complexity.  It makes re balancing harder, and is difficult to justify.  Ensure that your advisor is using an appropriate benchmark to your portfolio to compare to simpler strategies over the long term, if you are utilizing an asset manager.

I see overlap too with portfolios with a mix of stock positions, ETFs, and mutual funds.  Ensure that you evaluate why you may want to own an individual stock alongside an ETF or mutual fund that has exposure to the same position.

Lastly, with the plethora of funds available to investors, and constant bombardment of information, and short term out-performance of some funds, it can be easy to slowly accumulate many positions over time.  Ensure to look at your baseline strategy(Your why), before selecting new funds and do not chase performance.

No re-balancing strategy

While not every investor/situation needs to focus on this, many do.  A rebalance is essentially bringing all of your investments in a particular account back to their desired percentages.  It is completed by selling some of your investments that overperformed, and buying under performing assets.  It can be used to increase or decrease exposure as you get closer to using invested funds, (Trimming down equity for someone approaching retirement in an organized and structured way).

Aside from cash flow planning, helping investors diversify appropriately and educating is one of the most common areas of planning we help investors with.  There is no one size fits all solution, which is why we step in to help bring clarity to this.

How does NFP help educate and mitigate these issues:

We help educate investors by:

• Simplify your investment strategy

• Become educated on what assets make sense in which accounts.

• Teach you how to properly re-balance and adjust your account to your goals.

• Review your investment overlap.

• Help create tax efficiency.

Investment Planning is one of the most common areas we focus on.  It is incredibly vast and impossible even for the most skilled self-investors to master, making it important to seek guidance and a second opinion to help identify improvements, biases, and strategies to help align your investments to your goals.