06 Apr

Why Your Portfolio May Not Be as Diverse as You Think

Grant Blindbury

Grant Blindbury

Grant Blindbury has been working in the Investment Advisory industry since 2003 managing assets of affluent individuals and pension plans. Grant earned his bachelor's degree in Business & Economics at the University of California at Los Angeles (UCLA) in 2001. Grant specializes in working with clients approaching or entering retirement and positions them for success by coordinating their most important financial affairs. Grant's goal, as his client’s personal CFO, is to deliver both the financial outcome and experience necessary to accomplish their most important goals. In 2007, Grant earned the professional credential CERTIFIED FINANCIAL PLANNER™ (CFP®). He is president of his local Estate Planning Council and participates in multiple professional learning groups. He is on the Board of Directors for Big Brothers Big Sisters of Ventura County as well as being a “Big” himself. From the outset he was drawn to the client-centric model that fee-based advisory services provided and joined forces with Fields Financial Associates, Inc. He would later partner with the founders of Fields Financial Associates to form FMB Wealth Management. He has been a licensed Investment Advisor since 2003.
Grant Blindbury

As a savvy investor, you probably already know that diversification is key to having a balanced, secure and low-risk financial portfolio. By dividing your assets among a variety of asset classes, industries, geographic regions, and stock types, you are minimizing harmful downside risk that may only affect a single industry or region, thus preserving your hard-earned wealth as a whole.

Too often, however, retail investors and professional advisors alike design portfolios that may look diverse on the surface, but are, in fact, far from it. This false diversification can be rooted in a number of erroneous — or downright manipulative – actions or schools of thought. Some advisors build portfolios that are so complex that it dupes investors into believing that their portfolio is diverse. In other cases, an individual’s portfolio consists of a variety of mutual fund company names; however, the underlying assets behind these names are anything but varied.

Here are a few reasons why your portfolio may not be as diverse as you think:

Name Diversification: An Illusion of Safety

When you take a look at your financial statement, you will likely see a list of fund companies. The more fund companies listed, the more diverse your portfolio, right? Wrong. True diversification depends much more on the allocation of the underlying stocks and bonds in your portfolio, not the managers who purchase them on your behalf. Having your assets invested with a single fund company doesn’t necessarily mean that your portfolio is at risk. Likewise, having your portfolio divided among dozens of different fund companies doesn’t necessarily make it diverse.

Complex Portfolios: More is Not Merrier

Investors, beware of portfolios or investment schemes that seem overly complex. Investing should not be all that complicated. In fact, the more complex your portfolio, the harder your true diversification is to track, which may cause you to unknowingly tip the scale in one direction or another. While diversification does require that you balance some different funds, there is no reason for portfolios to hold 15, 20 or 30 different funds, especially if they are from many different fund families. Not only do you complicate things and lose sight of the overall investment strategy, but you may are also be paying more in fund fees for this increased risk. Owning a multitude of individual stocks or mutual funds is not the answer to a stronger, more diverse portfolio.

To determine if your portfolio suffers from false diversification, work with your investment advisor to document the ideal characteristics of your overall portfolio as they relate to your savings goals, then take a deeper look into the allocation of your asset classes, stock types and geographic variety. Is your vision and reality aligned? If not, perhaps re-allocation or simplification of your portfolio is in order. It is also important to make sure you are paying the lowest prices possible to ensure your earnings aren’t eaten away by high fund management fees.

Investing shouldn’t be overly complicated or contingent on the day-to-day moves of individual fund managers. Not only can this cause more undue stress than necessary, but the added risk you take on by falling for false diversification can put a lifetime of hard-earned savings at risk. To get a second opinion on your portfolio’s diversification, contact FMB Wealth Management and we would be happy to complete a portfolio diversification audit for you.

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