Sometimes people start with a good idea, but then they implement it in a weird way, and in doing so end up negating the good in the idea.
Let’s take diversification for example. A simple idea that makes lots of sense. Don’t put all your eggs in one basket.
The problem is sometimes people blindly follow the adage and not really think about the logic behind it.
Dogmatically getting more and more and more stuff because “we can’t have all our eggs in one basket” is not the same thing as proper diversification. In fact, getting more and more and more can make things worse, not better.
Sometimes people will own multiple mutual funds with the same mandate. Let’s say that you own four different Canadian equity funds held at four different banks. You might think that you have lots of eggs in lots of baskets, but you would be wrong. You have the same thing four times over. You have duplication, not diversification.
Super easy for me to prove this to you. Pull up the top ten holdings of four different Canadian equity funds, run by four different portfolio managers, who work for four different banks. What you will find is that all four funds own the same stocks.
That’s not what people mean by not having all your eggs in one basket. You are just buying more of what you already have. You are adding the complexity of holding multiple accounts without the actual benefit of diversification.
Here’s another example. Let’s say you have $500,000 to invest, and you are thinking of buying five $100,000 GICs at five different banks. To be fair, there could be some valid reasons to do this, but today we are talking about the unintended consequences of having eggs in too many baskets.
The drawback of taking your GIC business to multiple institutions is that you are also reducing your negotiating position. If you go to the bank and say, “I have $500,000, what’s the best rate you can do?” you are much more likely to get their attention than if you try to haggle with a smaller amount. Especially if you are prepared to take your business across the street if your banker is not prepared to sharpen their pencil. If you are trying to negotiate a better deal, then spreading your money out may actually be counter productive.
Some people will put their investments with multiple financial advisors because they “can’t have all their eggs in one basket.” Believe it or not, this can end up being a really bad idea.
The practical problems of getting your advice from multiple sources can mean it costs you far more than the potential benefits. Mistakes and missed opportunities happen when you are getting your advice from multiple sources. And I don’t mean only things like differences of opinion on subjective matters.
Mistakes like missing a TFSA contribution because of an assumption that it was made elsewhere. Or exceeding the TFSA contribution limit because both advisors agree that topping up the TFSA makes sense, and so it happens twice.
Or maybe both advisors think too much alike, and both start recommending the same type of funds. The irony is, you went with two advisors because you didn’t want to have all your eggs in one basket, but we already discussed how duplication is not diversification.
Sometimes people might think, “I will give half my account to one advisor, and half my account to another, and at the end of the year we will see who performed better.”
Folks, this is not a horse race.
Here is why that idea is setting you up to fail. Past performance is not a good indicator of future performance. Just ask all the people who invested in silver because it did so well in recent months, only to see it collapse by more than 25 percent in just 24 hours.
Perversely, if you do try to pit financial advisors against each other in a battle of who can produce the most short-term performance, you are actually incentivizing your advisor to take on additional risk with your money. Think about it. If your advisor knows he is going to get fired in a year if he doesn’t outperform the other guy, he might as well go all-in on cryptocurrency or something crazy. If he gets lucky then he wins the entire account. If he’s wrong, oh well, you were going to fire him anyway. But it’s your money that he is making these bets with. Is that really what you want?
The objective is not to see who can introduce the most risk into your portfolio. The objective is to help you reach your Great Goals in life.
Not having all your eggs in one basket is a great idea. Just make sure you understand how to do it properly.
Brad Brain. CFP, R.F.P., CIM, TEP is a Certified Financial Planner in Fort St John, BC. This material is prepared for general circulation and may not reflect your individual financial circumstances. Brad can be reached at www.bradbrainfinancial.com.
 | A guest post by
|