Broker Check

One Basket

One Basket

| March 22, 2021

We’ve all heard the old adage, “Don’t put all of your eggs in one basket.” These words speak truly great advice and have led to many a success. However, it has led many others to scratch their heads and wonder, “So, what baskets should I use? And how many are we talking about?” In this article, I would like to address one of the most common investment issues people face.

We have found that when many of our clients first come to us, their financial assets are spread across multiple brokerage or financial planning firms in what they consider to be an effort to diversify – dividing their eggs into different baskets. Unfortunately, these attempts to manage risk actually caused them to be exposed to what many believe are the three greatest risk factors to an investment portfolio:

  • The lack of an overall asset allocation plan,
  • The lack of management for the overall portfolio, and
  • The lack of any coordination or management of correlation among the investments within the overall portfolio

So, which baskets should you have and how many? These questions are at the core of what is referred to as an asset allocation plan. A well-designed asset allocation plan manages risk through the diversification among different investments, such as stocks, bonds, real estate, cash, etc., and investment classes within the investment categories. This plan should be reflective not only of your feelings regarding risk tolerance and market conditions, but also of your present situation and future, as well as your family dynamics.

One of the greatest risks created by the lack of an overall asset allocation plan is in regard to your feelings. If your assets are spread across multiple firms, who is in charge of the hen house? You, right? Right. Are your emotionally attached to your assets? Of course, you are – you have spent your life accumulating those assets. However, emotions about investing are usually driven by current events. In other words, the stock market took a big dip and you might want to move everything to cash. Or, tech stocks are doing great and you want to buy more and hold on to them. Sir James Goldsmith stated, “If you see a bandwagon –it’s too late.” It is important to let someone who is emotionally unattached to your investments work with you to create a disciplined process to investing in order to eliminate the risk of emotion driven decisions.

Asset allocation is not a static process. It is inevitable that your asset allocation plan will be pushed out of balance by investment growth or decline. Think of your asset allocation plan as a good old coconut pie. In order for that pie to be good, it must have just the right amount of sugar, the right amount of flour, eggs and so forth. If too much sugar is put into that pie, it is no longer good. Likewise, it is important to keep your asset allocation plan properly balanced to reduce portfolio risk. This is a proactive process known as rebalancing. Don’t forget - Life happens. You will experience life changes and the economy is always subject to change. During these times, it is important to be in a position to consider reallocation. This means going back to the basics and making sure the asset allocation plan fits the criteria for your life and the economy. Bear in mind that asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. And as we’ve mentioned before, it is important to be proactive as opposed to reactive.

The final risk associated with having your financial assets spread across multiple firms is lack of any coordination or management of correlation among the individual investments within the overall portfolio. Although this sounds really complicated, it is not. As you may have guessed, I really like coconut pie. But I also like BBQ, salmon, and ice cream. Now, if I took all of these foods and mixed them up in one big bowl, how do you think that would taste? Probably not very good. Or if you had a mouthful of BBQ before a mountain of pie and ice cream, you’d probably not fare well either. Much like each investment, they must not only stand alone as being superb, they must be measured on their ability to perform together. So, how does one firm know if you have ice cream at another firm? They simply don’t, and this could mean critical overlaps or gaps in your portfolio.

So, what is the most effective way to manage the risk of one basket and the risks associated with spreading your financial assets across multiple firms? Work with a firm who has an open architecture amid many baskets, and who takes a proactive interest in guarding your eggs.