Are you really diversified?

Diversify. Are you diversified? Are you over diversified? Do not put all your eggs in one basket. Diversification is key! If those sound familiar it is because that is a standard line that any financial advisor will tell his client. “You should be diversified.” This is good advice but the failing of most financial advisors is that they never take the time to explain what diversification actually means and even worse they do not take the time to find out if their clients are actually diversified.

Here is what people think diversification means…

Many think that being diversified means having pockets of money at many different financial institutions. I have worked with many clients that have an investment account at TD, a TFSA with CIBC, an RRSP with Canada LIfe, and a LIRA at CI Investments. When I ask them ” is your portfolio diversified?” they will rattle off the list of institutions they have money with but can not tell me what is in their portfolio. Here is where the problem comes in…you could be invested at 30 different institutions but if your money is invested in the exact same way, you are not diversified. For example, if all your investment accounts at TD, CIBC, Canada Life, and CI only hold Microsoft you are not diversified.

Here is what diversification actually means.

You do not need to necessarily hold multiple accounts and multiple institutions to achieve diversification. This can be accomplished by having your investments under one roof and simply making sure the money is invested across multiple sectors (sector diversification), multiple geographies (geographical diversification) and multiple asset classes (asset class diversification) can give you the diversification you need. Having a portfolio that has some holding in technology, health care, infrastructure, energy, and precious metals would make it diversified. Having a portfolio with companies that operate in the US, Europe, Canada, and other countries would give geographical diversification. Having a portfolio with some real estate, equities (stocks), cash and gold give you asset class diversification.  Whether the money is held at a single institution or multiple institutions should not matter if actual diversification is taking place.

Over Diversification

One thing to note is that you can be over-diversified.  This means that if you have too many different types of investments, holdings and asset classes it can actually make your investment perform worse and not add any additional security to your portfolio. Some financial advisors call this diworseification. Meaning you are actually making your investments worse.

Conclusion

Overall, there is nothing necessarily wrong with holding money at more than one institution and you may very well be diversified. That being said, if all the financial institutions you deal with invest your money in a similar way, you may not be diversified at all. Further, you may be diworsified. My personal opinion is that we should simplify our lives and have everything under one roof and make sure it is well diversified.