Written by: Michele Burkholder, Founder of The Burkholder Team
As Easter approaches, I am reminded of the old adage, Don’t Put All Your Eggs in One Basket. Andrew Carnegie has been credited with saying, "Put All Your Eggs in One Basket, and Then Watch that Basket.” What does that mean? How does that apply to me?
When I meet with clients and talk about not Putting all Your Eggs in One Basket, we are usually talking about diversification. In Finance, most people think of diversification as creating a good range of investments within a single portfolio. But as a Financial Advisor it’s much deeper and broader than that. There are several levels of diversification.
Assets: When constructing a portfolio, the first step is to find a good mix of assets. Stocks, Bonds, Cash and Real Estate are just some considerations.
Geography: You also need to consider the mix of foreign versus domestic assets.
Company and Manager Oversight: When investing in Managed Money accounts &/or Mutual Funds you want to consider choosing more than one company/manager.
Reaction to Market Fluctuations: Safe investments generally have a lower return in an up market than their Aggressive counterparts. In a down market, they will likely lose less. It’s important to have both types of investments in your portfolio so they can act as a natural offset.
Industries or Sectors of the Economy: Energy, Technology, Health Care, Consumer Cyclical to name a few. This is particularly important if you have employee company stock. You could become too concentrated in one Industry.
Timing: This refers to when you need the money. Assets you will need to use in the next 5-10 years should be investment more conservatively and be easily accessible; without sales charges or surrender charges. Longer range assets can afford to be invested more aggressively to keep up with inflation.
Guarantees: You don’t want to rely on one insurance company to guarantee all of your insurance products. Specifically, Life Insurance and Annuity Companies. All guarantees are based on the claims paying ability of the issuing company.
Customer Base: For myself, and my business owner clients, you also want to make sure that no one client is more than 20% of your reoccurring revenue. Consider what could happen if they decide to leave or go out of business.
My ultimate goal is to ensure that no matter what happens in the market or the economy, my clients have their eggs (money or income source) in several baskets. This helps to smooth out the risk and ensure they won’t lose their entire portfolio all at once.
Can you diversify too much? Absolutely! If moving your assets or protection to more baskets than you need can result in extra fees. In the form of break points, account fees and sales charges. As you can see, it’s really complicated and it’s not unusual for clients not to know what they are actually invested in, particularly when using Mutual Funds and Exchange Traded Funds. That’s why we suggest you work with a trusted financial partner to help you navigate your choices.
Michele Burkholder* is the Founder of The Burkholder Team, a family financial practice whose mission is to Provide Families, Business Owners & Their Employees Optimal Guidance to Help Them Reach Their Financial Goals.
* Registered Representative of, and Securities and Investment Advisory services offered through Hornor, Townsend & Kent, LLC. (HTK). Registered Investment Advisor, Member FINRA/SIPC.
1847Financial | 161 Washington Street, Suite 700 | Conshohocken, PA 19428 | Phone 610.771.0800 | Fax 610.771.100 HTK is a wholly owned subsidiary of Penn Mutual. The Burkholder Team and 1847Financial are not affiliated with Hornor, Townsend & Kent, LLC
For Educational Purposes Only – Not to be relied on as financial, tax, or legal advice. All investing involves risk and no investment strategy including diversification or asset allocation can assure a profit or protect against a loss in a down market. Past performance is not a reliable indicator of future results.
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