3 Diversification Mistakes that cause Dysfunction

Every adviser talks about diversification. Basically having your investments spread across a variety of asset classes, such as large companies, small companies, international, etc… The weightings assigned to each asset class mainly depends on your time horizon, goals, and risk tolerance.

One of the largest mistakes investors make is thinking they are diversifying their portfolio by diversifying the advisers or companies managing their money. Having your assets spread across companies may seem diversified but actually can be destructive to your goals.

When one person isn’t seeing the whole picture, advice becomes centralized on what they know. The more spread out you are, the narrower the scope of the advice. Be open with your advisers about what you have, and where.

The second mistake is concentrating on one asset, gold comes to mind. Whenever anyone wants “to sell everything and buy gold.” it usually sends chills down my spine. The whole point of diversifying is making sure you are not relying on one asset to fund your goals.

Every asset class has bad years and good years. No one can accurately predict the ups and downs. When everyone invests in the same asset a bubble can occur when emotion trumps fundamentals. Remember when people say real estate “always goes up”? Or technology can only go higher? Beware of concentrating money in only one area.

The last diversification issue is diversifying your taxes. Not only do you have options on where and how you are taxed, most people forget to think about it as they plan for retirement. Tax deferred and tax free can be the difference in a few hundred dollars a month in income. Although the tax situation is still uncertain right now, it’s not a bad idea to explore Roth IRA‘s and whether you should hold growth stocks in a taxable account or not.

Remember an IRA is great for tax deferral but eventually you will pay income tax on every dollar coming out when you begin receiving distributions.