You have probably heard that diversification is a key to investment success. So, you might think that if diversifying your investments is a good idea, it might also be wise to diversify your investment providers. After all, aren’t two (or more) heads better than one?
Before we look at that issue, let’s consider the first half of the “diversification” question — namely, how does diversifying your investment portfolio help you?
Consider the two broadest categories of investments: stocks and bonds. Stock prices will move up and down in response to many different factors, including good or bad corporate earnings, corporate management issues, political developments, and even natural disasters. Bond prices are not immune to these dynamics, but they are usually more strongly driven by changes in interest rates. To illustrate: If your existing bond pays 2 percent interest, and new bonds are being issued at 3 percent, the value of your bond will fall, because no one will pay you full price for it. (Of course, it may not matter to you anyway, especially if you planned to hold your bond until maturity, at which point you can expect to get your full investment back, providing the bond issuer doesn’t default.)
Here’s the key point: Stocks and bonds often move in different directions. If you only own U.S. stocks, you could take a big hit during a market downturn, but if you own domestic and international stocks, bonds, government securities, certificates of deposit and other types of investments, your portfolio may be better protected against market volatility, and you’ll have more opportunities for positive results. (Keep in mind, though, that even a diversified portfolio can’t prevent all losses or guarantee profits.)
So, it clearly is a good idea to diversify your investment portfolio. Now, let’s move on to diversifying financial service providers. Why shouldn’t you have one IRA here and another one there, or enlist one advisor to help you with some types of investments and a different advisor assisting you with others?
Actually, some good reasons exist to consider consolidating all your investment accounts with one provider. For one thing, you’ll keep better track of your assets. Many people do misplace or forget about some of their savings and investments, but this will be far less likely to happen to you if you hold all your accounts in one place.
Also, if you have accounts with several different financial service providers, you might be incurring a lot of paperwork — and many fees. You can cut down on clutter and expense by consolidating your accounts.
But most important, by placing all your accounts with a single provider, possibly under the supervision of a single financial advisor, you will find it much easier to follow a single, unified investment strategy, based on your goals, risk tolerance and time horizon. You won’t get conflicting advice and you’ll receive clear guidance on important issues, such as the amounts you can afford to withdraw each year from your retirement accounts once you do retire.
Diversification and consolidation — one is good for building an investment portfolio, while the other can help you invest more efficiently and effectively. Put the two concepts together, and make them work for you.
Reed Wilcox is a financial advisor in the Rutland office of Edward Jones. Reach him at 773-9607.