Don’t Put All Your Money In One Basket
Written by Joel Bengds
We all have heard and probably abided by the saying, “Don’t put all your eggs in one basket.” We know the literal implications of dropping a basket of eggs and why it’s a good idea for a farmer to spread out the risk. At the end of the day, a little organization and discipline can ensure there will be eggs to use even if one basket of eggs does not survive.
In today’s world this agrarian axiom has been used as an investment maxim: Don’t put all of your money into one basket. There are, however, misconceptions when it comes to spreading risk. Many interpret this advice by creating as many accounts as possible and think they are protecting their “nest egg”. In reality what they have done is complicate life and, in most cases, increased their out-of-pocket costs by having to keep up with multiple accounts at various institutions.
There are occasions to have multiple accounts when it comes to FDIC protection or different financial planning strategies, but that is where a financial planner acting as a fiduciary can help look at the entire situation. A fiduciary makes recommendations in the client’s best interest.
Portfolio diversification will be the context within which we will be discussing this popular phrase, “Don’t put all your money in one basket”. This is much different than custodian or account diversification. When HSC Wealth Advisors looks at a portfolio, we start with broad categories, stocks and bonds. I often tell folks there are two things you can do with your investment dollar, own (stock) or loan (bond).
With portfolio diversification as our goal, investors need to decide what type of investment vehicle will be used. Will the investor purchase individual stocks and bonds; or will they select closed end mutual funds, open mutual funds or exchange traded funds (ETF)? There are many factors involved when deciding how to invest in the different markets. A conviction built on research and knowledge should be the guiding principle.
Inside a diversified portfolio, investors don’t want to have investments that behave similarly. In the simplest form if you have two negatively correlated investments, they tend to move in opposite directions over time. On the one hand, you will have something going up or maintaining value to sell if you need to take a distribution. Conversely, if you have money going into your portfolio, you will have an investment to buy that is down in price. The goal of most investors is to buy low and sell high. With diversification and discipline, we can do this.
As we drill down into the broad markets of stocks and bonds, we can further diversify with asset classes that have different investment objectives and goals. Within the bond allocation, these would include short-term, intermediate term, long-term, high-yield, global, municipals, U.S. treasuries and so on. On the stock side of the portfolio, there are domestic companies that range from micro to mega cap along with developed international to frontier countries. Going another layer down, each of these sub categories have further diversification possibilities with different sectors that include technology, healthcare, utilities, real estate, energy, consumer staples, and many others.
Hopefully you are seeing many different levels of diversification in which we can construct a portfolio in a prudent manner. A good analogy is that your portfolio is a crockpot of Brunswick stew that has a lot of different ingredients in various quantities. I have a son who does not prefer eating onions. When onions are used to compliment other ingredients, he often will not even notice he is eating them. However, when diversification is misinterpreted, it is similar to putting 25% of the same stew in four different crockpots. This simply increases expenses and complicates investment management.
At HSC Wealth Advisors we spend a lot of time constructing and monitoring portfolios. We don’t believe there is a one size fits all approach. We believe in diversification based on our client’s goals and objectives. Our mission is to navigate through the different landmarks of financial planning for our clients’ benefit. The end result is a plan that places “eggs” in more than one basket.