Is Your Stock Portfolio Well-Diversified or Has It Been “Deworsified” into Expensive Complexity by Your Financial Advisor?

More Is Not Necessarily Better When It Comes to Investing

Diversification is one of the ten commandments of investing.

Don’t stake your financial future on only one horse, no matter how sure you are it’s a winner. Because when it gets injured, ALL of your wealth suffers. If you own a bunch of horses, no one injury will set you back, but if there’s an equine flu going around, your whole portfolio gets sick. It’s wise to own a mix of assets that don’t move in step function to changing conditions.

In the wrong hands, though, diversification can become “deworsification.”

My friend asked me to review her $6000 IRA, which she’d funded in 2020. Never mind that her investment advisor failed to invest it for 4 ½ months, costing her $900 bucks. It got even worse. When I opened her statement I did a double-take.

There were 13! ETFs! in a $6000 IRA!

It made no sense. Had it been 13 very different stocks, diversification would have been justified. But an ETF holds an assortment of stocks — each ETF is by definition diversified. You need way fewer broad market ETFs than stocks to get a fully diversified portfolio.

Having a mish-mosh of 13 ETFs in an IRA of that size was a head-scratcher.

Some ETFs had overlapping strategies and duplicate holdings — why hold more than one? Others were teeny positions in super niche ETFs — even if they quadrupled in value they wouldn’t budge the portfolio.

“Deworsification” in this case was used to make things look very complicated.

So complicated that the advisor’s 1% fee would be justified. Because if the portfolio were made up of 2 to 4 well-diversified ETFs with different exposures (e.g. stocks and bonds, U.S. and International), perhaps the client would realize they could do it themselves for free.