Financial Opinion and Insights

Portfolio Diversification – Don’t Be Fooled

Jim Lorenzen, CFP®, AIF®

Too often you’ll see senior executives and business owners make the mistake of putting all their eggs in one basket – their own company.    Depending upon the value of a single business isn’t a good planning strategy.  The same intelligent people who would never put their entire life savings into a single stock will still often bet their entire future on the fortunes of a single business, simply because they own it or work for it.

“But, Jim!  Warren Buffett has ALL his money in his own company, Berkshire Hathaway!”  

True enough; but, you neglected to mention that Berkshire Hathaway’s business is investing in scores of other businesses.  Berkshire IS diversified.

Proper diversification is a simple concept to understand; but, how to do it?  Today, the ‘flavor of the month’ is the target-date fund.  The idea is to select the fund with a target date that coincides with your retirement date!  Like all strategies, it has its advantages and disadvantages; but it’s most likely always better than no strategy at all.  The advantage is an obvious one:  It’s easy to do and it frees you from having to make a lot of allocation decisions – at least seemingly. 

The disadvantage is hidden inside the advantage:  You’re not making decisions that, maybe, you should be making.   For example, suppose your target date is 2027, 15 years from now; should everyone with that target date have the same allocation?  If one person has saved only $100,000 and someone else has already amassed $1.2 million through investments, inheritances, and maybe other sources, should  both of them be investing the same way?  Do both of them have the same `return’ requirements or risk profile?

The answers to those and other questions will help determine what the appropriate allocation should be for each investor.  Those participating in 401(k) plans should ask their employer about available tools or advice; but it’s likely everyone should get professional advice which will encompass their entire financial picture.


Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner™ and An Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.  Twitter; @JimLorenzen

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