You’ve likely heard the saying when it comes to investing, “Don’t put all of your eggs in one basket”. That’s a great way to think of diversification. Diversification of your financial portfolio involves investing in a variety of investments and asset classes. The opposite of diversification is concentration. In the most extreme example of concentration, one would have all of their money invested in a single stock of one company. If that one company fails, you lose all of your money. That is a big risk to take that could have easily been mitigated with diversification, or investing in other companies and other asset classes.
What diversification is not, though, is spreading your money around between a couple of financial advisors. Occasionally, someone will say to me “I want to move some of my money to you to give you a try. We’ll see who does better, you or the other guy that I’m currently with.” After some conversation my advice always is: pick one. Having two advisors where each does not know what the other is doing is kind of like having two general contractors building the same home without communication to each other.
One time, we had a client contributing to a ROTH IRA with our firm and to a second ROTH IRA elsewhere unbeknownst to us. They didn’t tell us and ended up overcontributing because they didn’t know the IRS rules and didn’t tell us they had an IRA account elsewhere. Another time, I had a client who didn’t tell me about the inheritance she received from her mother. She wanted to keep that separate and with the firm that her mother worked with. Problem was, she didn’t know she was supposed to take a Required Minimum Distribution from the inherited IRA and literally came within days of the five year rule deadline before she told me about the account. Thankfully, we caught it just in time, as the penalty for missing an RMD is 50% of what should have been taken as the RMD. In the case of the client’s inherited IRA at that point, that would have meant 50% of the balance of the account. A prudent advisor will construct a diversified portfolio of investments for his or her client. It is important that we know what your other accounts such as your 401(k) are invested in, so that we can manage an allocation that fits together as a whole picture. For example, with my clients who have 401(k)’s, I will often provide investments that they cannot access within their employer sponsored plan to truly compliment what they are already doing, creating a well-rounded portfolio.
Recently I had a client say to me “you get to a point in your life where you just accumulate so much in so many different areas and it’s scary to think that you could miss something because you didn’t know”. In another conversation with a recently retired new client, we discussed how this is an entirely new chapter with new rules to be aware of, when taking distributions and coordinating income with a pension, social security options for her and her husband as well as their health insurance premium costs, including future Medicare premiums.
Your beneficiaries will be grateful for a well-organized portfolio, too. I recently spoke with a father who was trying to sort out his son’s financial affairs after his son’s passing. He said his son did everything on his own through his phone and computer. The father was extremely frustrated not knowing where to even locate accounts. Making matters even more serious, the son had two young dependent children. I sympathized, as I’ve worked with clients who’ve had the task of hunting down multiple accounts and life insurance policies from a passing family member, where just the tracking down of such took many months and caused significant chaos.
Bottom line is, diversify your investments, not your advisors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
(Author’s note: Due to industry regulations, I am prohibited from responding to any online comments. I welcome you to contact me via e-mail: firstname.lastname@example.org).
LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Financial Professionals and can be reached at (715) 343-9600 or email@example.com. www.SchulferAndAssociates.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.