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The Myth of Putting All Your Eggs in One Basket

We’ve all heard not to put all our eggs in one basket when it comes to investing. Most of us would agree that sure, it’s good to have diversification but it seems like this concept of diversification has become misunderstood.

When someone says to me “I don’t want all my eggs in one basket,” they are saying they want to spread their risks out. An investor that invests only in the US stock market is putting all of his eggs in one basket. An investor who invests only in bonds is putting all of her eggs in one basket. They aren’t diversifying their portfolio and as a result are taking on risk.

Some investors make a mistake and think they are diversifying their investments, but in reality the opposite is more likely. Here are a few examples to consider:

Common Problems of Improper “Diversification”

  1. Multitude of Accounts: If an investor has a lot of different assets in different accounts it may be hard to track them all. They receive multiple statements in the mail and have to navigate different custodians when they need to make changes. It could cause confusion particularly around tax time. It becomes an administrative issue.
  2. Tax Impact: Having multiple accounts may cloud one’s view of tax consequences. They could be dealing with gains and losses in different accounts. If not coordinated, an investor could be paying more in taxes than needed. We refer to this as a tax loss harvesting strategy, where we sell investments at a loss to offset ones we’ve sold for a gain.
  3. Similar Underlying Investments: A common situation occurs when an investor has multiple mutual funds from different fund companies, thinking they are diversified. But in reality, those funds may own the same or similar underlying investments. The investor may be putting all their eggs in one basket and not even realize it. Similarly, we see investors who own utility stocks and income oriented mutual funds. When we dig into the holdings of the mutual fund, we aren’t surprised to see it comprised of utility stocks, as well. Again, the investor is putting a lot of their eggs in one basket.
  4. IRA RMD: Required Minimum Distribution (RMD) can be a massive headache if you haven’t consolidated your IRAs or 401(k)s. Missing an RMD (or not taking it out) can result in a 50% penalty.

Get Rid of Unintended Risks

As we’ve seen, the myth of diversifying assets can be misleading. It’s important to understand the true implication of diversification. Knowing how to invest properly by getting rid of unintended risks and allocating your retirement portfolio can give investors peace of mind and confidence in this present economy.

How to Avoid the Biggest Mistake When Starting Social Security

The media is causing millions of Americans to make a serious mistake when it comes to social security collection strategies.  We see articles that discuss  ways to “maximize” the social security benefit using clever, new methods such as the “file and suspend” approach.  But they completely miss the ball on the most critical issue.  They do not stop and ask what your GOALS are for Social Security, which should be the discussed first.  Only then should specific strategies be evaluated. Here are a few goals to consider:

  • We want to retire at a specific age and start collecting social security
  • We want to start claiming benefits as soon as possible
  • We want to maximize the income over the years we have together
  • We want to minimize any decline in income for the surviving spouse
  • We want the surviving spouse to receive the maximum annual benefit
  • We want to maximize the survivor benefit (and receive income early)

Once you know your goal, then you can move to the next step and decide how should you collect the benefit.  Maximizing the cumulative benefit is just one goal and may be a poor choice once you take the time to compare them to other options.

Steps to Take After Leaving a Job to Get Your Financial Life in Order

Leaving a job can be a frightening proposal, even if you’re moving up in the world—navigating retirement plan rollovers, lost and gained benefits, pay and cost-of-living changes, and the other variables can feel quite daunting. Fortunately, if you take a moment and relax, you’ll find that a methodical, thoughtful approach makes it all much easier. Today, we’ll help you navigate your way through the financials of leaving a job without getting stressed about the endeavor.

Figure out what you’re losing and what you’re gaining.

Take a close, hard look at the benefits you’re losing as you leave your job, noting the value of stock options, leave time, child-care, insurance, etc. If you’re moving immediately into a new job, you’ll want to evaluate what you’re gaining the same way, for ease of comparison. A firm understanding of the actual value of what you’re losing or gaining is important.

Look into what you can take with you.

Not every valuable benefit vanishes when you leave a job. You might have several decisions to make about more flexible benefits, such as stock options, which you’ll want to go over with a tax or finance professional—the details around these decisions can get quite complex quite quickly, so don’t let yourself drown alone in the specifics of rolling over your 401k to a new plan or an IRA, keeping or selling stock options, etc.

Negotiate to reimburse losses.

If you’ve noted a loss of value in moving to a new job, that information can be useful for negotiating additional pay, benefits, and one-time expense coverage (for relocation, etc.). Otherwise, look to a financial planning adviser for assistance in finding moves you can make to shrink the gap—you may be able to defray relocation expenses with tax deductions, qualify for new credits, etc.

Undertake a thorough self-audit.

When the dust settles, it’s time to conduct a thorough self-audit and see where your income, benefits, investments, retirement savings, and other financial considerations all stand. Make sure to review plans which, while not directly associated with the job you’re leaving, may interact strangely with your new situation—insurance, investments, estate plans, and the like all need a second look over after a major change such as leaving a job. Take your time, get professional financial planning assistance, and do it right, so you can rest assured that your big change is a move in the right direction.

Do You Have an Out-of-Whack Portfolio?

Research out of Investment Company Institute found that 11% of investors have not rebalanced their investments in the last five years.  As the US stock market continues its bull run, the value of US stocks represent a larger and larger portion of the portfolio.

All of a sudden, a portfolio that was balanced five years ago could be taking on more risk than you originally planned. Money Magazine states that a portfolio in 2009 invested 60% in stocks and 40% in bonds may have a current mix of 75% stocks and 25% bonds.  If you’ve not looked at your portfolio over the last few years. Now is a great time to get started.  Here is a summary of steps to take:

1)      Gather all of your statements – Investments accounts with us, accounts held elsewhere, 401(k) statements, etc. Tally up your overall asset allocation.

2)      Find what looks out of line – Does one mutual fund represent more than 25% of the portfolio? Does one stock represent more than 10% of the portfolio? Is one asset class accounting for a large portion of the portfolio?

3)      Look to rebalance – identify the appropriate asset allocation (primer found here).  You may also want to spend some time developing an asset location strategy, if we haven’t guided you already.