The One Area you Shouldn ’t Diversify

  Diversity might be good when investing, but too many financial managers can be a bad thing. Here are five reasons to put your eggs in one basket. One key principle of successful investing is to diversify your portfolio as broadly as possible to minimize the risk that any one specific investment will crush you. Many physicians extrapolate that concept to mean that they should hire more than one financial advisor. That usually creates more problems, not more sophistication. Here are five reasons why you should work with only one advisor: You control risk Asset allocation – which is the broad mix of investments in your portfolio – is the primary driver of your investment returns. Imagine you have a $1 million portfolio and you’ve split that equally between two financial advisors. The first advisor may have you in a 50/50 stock/bond allocation and the second may have you in a 80/20 stock bond allocation: Advisor #2 is taking more risk than Advisor #1. Your overall portfolio stock/bond allocation – which is what matters – is 65% stocks and 35% bonds. But suppose that you can only tolerate the risk of a 50/50 portfolio. Now you’re taking on more risk than what you feel comfortable with, and when the market goes down you’ll be in for some surprising losses. You control asset allocation Let’s say Advisor #1’s investment philosophy is based on the academic evidence that you can’t time the market and that he maintains the same asset allocation over time, b...
Source: EPMonthly.com - Category: Emergency Medicine Authors: Tags: Uncategorized Source Type: news