We all know it, we’ve all heard it over and over and over: don’t put all your eggs in one basket. Well, don’t do it!
Do you need a few reasons? Here are three:
- One: Diversification improves performance. This is so simple. Different asset classes perform differently at different times, so holding a mix of assets means that you will always have some money in an asset that is doing okay. This reduces your risk of losing everything, and it increases your long-run performance on a risk-adjusted basis (and, if done right, on an absolute basis, too). You don’t need anything fancy to diversify in a basic way, either: some money in US stocks, some in international stocks, some in bonds, some in real estate (usually your own house). If you don’t know where to put your money this year, put it in something different than you put it last year.
- Two: Do you want someone controlling all of your business? Years ago, when I worked for a mutual fund company, the big talk was about the financial supermarket – that people would keep their cash, their investments, their insurance, even their real estate transactions within the same company. American Express and Merrill Lynch were the biggest proponents. But our department head, a wise man, said this: “It will never catch on because the people who have money don’t want some salesperson knowing how much they have. They’ll work with a couple companies and play them off each other.” And you know what? He was right. Although there are benefits to working with a *g00d* financial planner and letting that person know your precise financial situation, that person should not control all of your assets. Spread your money out among a few different institutions to keep some privacy and let you comparison shop.
- Three: You reduce your risk of losing everything to fraud or malfeasance. It happens. In 2008, the Federal Deposit Insurance Corporation insured all bank customers, but will they next time? The sad stories of Bernard Madoff’s victims have a common thread: they gave him all their money because they thought it was low-risk and that he was doing the diversification. If only they had had some retirement money in a basic index funds, and owned their primary residences, and brought in a bank trust officer to assist in the proceeds of the sale of their businesses! It seems so obvious in hindsight. There are bad actors everywhere, and one way to protect yourself is to diversify.
One caveat (because there is always a caveat): Don’t divide your money across so many different assets and institutions that you get killed by fees and paperwork! Keep it reasonable, and you’re on your way.
