Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

How Many Investment Firms Should I Split My Money Between?

• Ari Taublieb, CFP®, MBA • Episode 225

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This episode explores the myths surrounding diversification and the importance of understanding various risk types in investment strategies. Hosts emphasize that merely spreading investments across institutions does not equate to true diversification and discuss risks such as single stock and sector concentration.

• Discussing the importance of understanding diversification 
• Examining different risks associated with investments 
• Introducing single stock and sector concentration risks 
• Addressing misconceptions about the S&P 500 and diversification 
• Highlighting institutional protections for investors 
• The pitfalls of managing multiple investment accounts 
• Encouraging effective portfolio management and consolidation

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Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

All right, Ari. So my account balance is growing. My net worth is growing. I need to diversify. We all know that I'm going to start moving my money Instead of just being at one institution. I'm thinking Schwab and Vanguard and Altruist and Betterment, and the more I can spread that out, the better.

Speaker 2:

What are your thoughts diversification but I don't know if you're really diversifying the right way and I don't imagine I could be wrong. But I don't imagine you want to have to log into a million different places to see your money. So this concept of diversifying sounds good. There's a reason. Someone doesn't want all their eggs in one basket, but it sounds like you're going to have like one egg in a lot of different baskets. I think there's a better way of looking at this.

Speaker 1:

All right. Well, let's talk about it. That's what we're going to talk about today is what are the different kinds of risk? Because, at the end of the day, diversifying is to protect us against risk, but risk is something I think a lot of us misunderstand. So we're going to find the types of risks that we should be looking at and how can we diversify against each of them Before we do.

Speaker 1:

This is our new show. This is our new channel channel. It's going to be hosted on the Root Financial YouTube page. So, ari, you have your YouTube page. Ari Taublieb, I have my YouTube page. James Canole. Both of our channels have a featured. What is it called? Featured videos, featured channels, yep, featured video. Okay, so either search Root Financial and you can subscribe, but if you search Root Financial, it's probably just going to take you to Ari's page or to my page. So if you want to find it, if you search Root Financial, it's probably just going to take you to Ari's page or to my page. So if you want to find it, if you want to find where this lives, go there, just as a quick commercial, so that people can find where this is going to live on YouTube. Where do you want to jump into today's episode.

Speaker 2:

Let's jump in with the question that came in and, just so everyone knows, we are always making these videos based off of your feedback, so you're going to be able to see this if you are on YouTube and if you're listening on the podcast app, you can, of course, listen to us share this. But this comes from lovematters7122, who says is it best to split retirement funds between more than one investment firm, say Fidelity and TIA or Vanguard? How do I think about this? I want to diversify, I want to be smart, but I don't know what I don't know.

Speaker 1:

Yeah, sometimes an example is, I think, the easiest way to illustrate something. So let's use an example. Let's assume that I do that. I have my money and I say I'm going to spread it out because I know this concept of diversification, I know it works. I'm going to split my assets between Fidelity, charles Schwab and Vanguard. Great, let's say, I come to you with those statements. I have three different statements from three different institutions and you look at both of them and not both of them. All three of them, and all three of them hold a hundred percent Tesla stock. How diversified are you going to tell me that I am?

Speaker 2:

You're not diversified at all. You have Tesla entirely across, no matter where you own it. You could own it in your backyard. That's just more Tesla.

Speaker 1:

More Tesla, and that's an obvious example, almost a laughably dumb example, but I think what it's illustrating is just spreading out institutions is not diversifying you Now, there is something to be said about that, because there are reasons to do so, which we'll cover. You Now, there is something to be said about that, because there are reasons to do so, which we'll cover, but also there's some reasons that probably you shouldn't do that, and we'll cover that as well. So I think the bigger question here is what types of risks actually exist. How do we protect ourselves? Which is the heart of the question is how do I ensure that my money is safe, so I don't wake up one day thinking I wish I hadn't done that. I should have spread out my money better. What are the different types of risks? Where should we start with that?

Speaker 2:

I would start with just making sure, wherever your money is number one, you know where it is meaning. Do you even know where to go to log in? But then you're probably thinking, hey, I don't want to wake up one day and go, hey, is that like money now saying zero, Because there was like a Silicon Valley bank thing and I heard about other stuff and, like Schwab and Fidelity, like, is my money safe? So insurance is a big way we can approach this, which is thinking through hey, am I insured and what does that really mean? But the same example you just shared, James, I'll give people at the grocery store of saying, if you just bought one banana but you bought it at Ralph's and Kroger and Lazy Acres, which is near where James lives Well, it's three bananas, Like you. Still nothing really changed. You could have just bought that all at one store and I would argue your life would have probably been easier because now you actually know how many bananas you have.

Speaker 2:

Imagine you're trying. You have, like many of you guys to, I don't know, I'm gonna say 20, 30 mutual funds all at different places. Well, now you have a bunch of grocery carts and they're not talking to each other. You might be buying the same thing over and over. So lots of different ways to go with it. What do you think? I know I'm putting the question back on you even, but best place to start with this.

Speaker 1:

Yeah, let's reframe it. Let's reframe it by asking what truly is risk, because, sure, this is a risk, but there's some pretty simple, easy ways to protect against it. The most obvious is just single stock risk. So I come to you, ari. I have three different investment accounts at Fidelity, at Charles Schwab, at Vanguard, and all three of them own Tesla. You're going to say, james, what on earth are you doing? There's not an ounce of diversification here. You have single stock risk Anytime. You own just one company, just one stock. I guess I should say it doesn't matter how many institutions you hold it at. There's tremendous amount of risk there. If that company does poorly, or if that company underperforms, your portfolio is going to be disproportionately impacted because all of your portfolio is in that.

Speaker 1:

We can then take it one step further. Some people say, okay, I don't just own Tesla, I own a few different tech companies, or I own a few different real estate companies or a few different healthcare companies. We might call that sector concentration risk. If someone came to us and they had a whole bunch of different stocks, but they were all real estate stocks or they were all healthcare stocks, or they were all financials, different bank stocks better than just owning one stock. But these are stocks that are all subject to the same types of risks. All the cyclical nature of whatever sector that is, they're all more or less going to be impacted the same way. So we'll see this.

Speaker 1:

A lot People come and they have more than one stock, they have a few different stocks, but they're all kind of around the same thing. Well, if something happens to interest rates, probably real estate stocks as a whole are going to be impacted. If something happens with different types of legislation around healthcare, healthcare stocks as a whole are probably going to be impacted. If something happens around bank regulation, interest rates, whatever it is, financial stocks as a whole are probably going to be impacted. So it's this other step of looking at it, of even if you don't just have one stock, but all of your stocks are in one sector. That too is a risk.

Speaker 2:

What about the S&P 500? Aren't I diversified if I have the S&P 500? That sounds like so many different stocks.

Speaker 1:

You are. You're better diversified than just owning Tesla S&P 500. That sounds like so many different stocks you are. You're better diversified than just owning Tesla or just owning a handful of healthcare stocks or real estate stocks or whatever it is. But we'd still say not fully. You're still owning large cap. Large cap meaning companies of a market capitalization of $10 billion or more, so really really large companies. You're owning those, and so the S&P 500, you could make the argument that you're definitely diversified because that S&P 500 segment makes up such a big portion of the global stock market by itself, because these are some of the biggest companies and the biggest companies in the world.

Speaker 1:

But it's still missing something. You're not getting exposure to small companies. You're not getting direct exposure to international companies, to emerging markets. You're not getting exposure to bonds, if you need bonds as a portion of your portfolio. You're not getting exposure to some of these other asset classes. So what we're kind of building is a progression. If you start from one single stock, not good. Build that out to a few different stocks all in the same sector better, but still not good. Build that out to own the entire S&P 500, which now you're owning 500 stocks Okay.

Speaker 1:

So significantly better than just owning one, or significantly better than just only one sector, but you're still not quite there. Being there really works from reverse of starting with well, what are your goals, what are you trying to accomplish? And then working backwards into how much of the S and P 500 should you own versus alternatives. But that is just going to be one piece of the pie, or one component of what you're doing. What these have in common, though, ari, is how much of this has to do with how many institutions. Could you have to do this at multiple different institutions, or could you do this all in one place?

Speaker 2:

You could do it all in one place. And I'll steal what one of my clients said. I'm not going to say their name because they asked me not to getting it's John. No, it's not John, but what I? I? A client asked me this. He said Ari, I get this. This makes sense. Why don't I have the small companies? Cause you just told me I'm not diversified because I only have the S and P 500. So why don't I have the small companies at Fidelity and the large companies? Why don't I keep those at Charles Schwab? And I said you absolutely could. But your life is going to have more hassle and there's no actual benefit you're receiving from doing that. So what we would rather have you do is have everything in one spot, because your life will be easier and we would argue, it's going to be more effective to actually manage your money because you're going to be able to see everything in one place versus having to log in to three different, four or five different institutions. And now your money just becomes you know, it just becomes a lot.

Speaker 1:

Yeah, I'll go back to your grocery store example. You know, maybe I want to go to lazy acres because they've got a great meat selection, but I want to go to the local farmer's market for fruits because it's just some great fruit from local farmers that we really like. You can make a case for that because you're getting different products at different places. But if you're owning your small caps, for example, at Fidelity, and your large cap stuff at Charles Schwab, they're not different products. Like sure, maybe one has a Fidelity wrapper, one has a Charles Schwab wrapper, but the reality is you could get the same stuff at both. You could get a Vanguard large cap fund at Fidelity or at Schwab. You get the same exact Vanguard small company fund at Fidelity or at Charles Schwab. So it's not saying okay, this place has better selection of fruits, this place has better selection of small cap stocks. It's truly going to different places to get the same thing, which is just causing more tracking.

Speaker 1:

We were talking to an advisor today who was helping a client unwind 70 accounts, 80 accounts. Do you remember how many it is? It's like 70. It's some really large number. And this is just after 10 years, 20 years, 30 years of investing. You just got to have stuff all over the place and it feels safer, but it really isn't. If anything, it's probably more dangerous, presents more risks because of a handful. I mean, what are some risks of having things at different places?

Speaker 2:

Oh, the risks is and I just saw this recently of someone that actually didn't move an old account with an employer and they just forgot about it. They're like I didn't even know. I mean, I was with that job from 22 to 24 and I never rolled that over, I never did a rollover from that old 401k into an IRA, and so I just forgot about it. And it turns out when I was younger I didn't know I should invest the money. I thought that's what a 401k did. I didn't know I actually had to then go in and put the investments. I thought it would just grow. And so they were kind of beating themselves up on the call and I said, look, you're a human, you're not a robot, so don't beat yourself up. But this is the risk of not consolidating is things get forgotten.

Speaker 2:

And many of you I would say arguably all of you are very busy people trying to optimize, so don't make it harder on your life than it needs to be, especially, as James just said, there's no benefit. There's a benefit. That's a different story, but up till now, james and I have discussed portfolio construction, how to think about interest rate risk and political risk and all these things. But I imagine a lot of you are also worried about. Hey, what if, like, something happens to that custodian? I want to have a million dollars over here and a million dollars over there. So if something happens, that all of a sudden I don't wake up and only have a million dollars when I had to.

Speaker 1:

Yeah, and let's talk about that in one second. There's one more thing I want to add to to to the risk of diversifying across institutions is let's use that extreme example you have 70 different accounts in multiple different places. What happens if you need to adjust beneficiaries? You need to do that in 70 different places. What happens when you are doing a review to see are my funds performing well or underperforming? How many different funds do you have across 70 accounts? Assume you only have five funds per account. That's 350. That's 350 individual funds that you need to be tracking and monitoring. How many of those are way more expensive than they need to be? How many of those are underperforming? How many of those are just redundant or duplicates of what you already have? The, the, the bandwidth that just goes into doing the nuts and bolts planning, beneficiary designations, diversification, the rebalancing, trading all of that becomes unnecessarily complex when you do that. Let's now go to what you were talking about. What if there is something that happens? What if all my money's at Bear Stearns and 2008 happens and Bear Stearns goes under? How do I ensure that my money's protected? Well, in that example, bear Stearns stock and for people who remember, bear Stearns was kind of at the epicenter of what happened in 2008. Its stock went from like $170 or $180 per share or something down to $2 per share. Before they essentially had to. They went under. I think Chase came, bought them out all that stuff.

Speaker 1:

Well, if you are a wealth management client, you're pretty terrified. I get my statements each month and it says Bear Stearns on there and Bear Stearns is no longer around. What happens? Well, if you're a client, if you own the stock, you lost your money. You got pretty much wiped out with that. But when you're a client of a firm there, think of your accounts as like different lockboxes. Like you have a lockbox at the bank and let's say, my bank is, you know, bank of America. Well, if Bank of America goes bankrupt, my money's still there. I'm not invested in Bank of America, they're just holding my money in a separate lockbox that I still have access to. So same thing with Bear Stearns. When they went under, if you had your money invested with them as your advisor, your money didn't get impacted outside of to whatever extent it was invested in the company, which hopefully it wasn't, but you are still protected there. So when you look at like the Charles Schwab's, the Fidelity's, the Vanguard's I just pulled this right from Charles Schwab's website as an example.

Speaker 1:

Any institution, so you should have what's called. There's something called the Securities Investor Protection Corporation, sipc, s-i-p-c, and it's going to protect customers up to about up to $500,000. So if there's something that happens, you're protected. So like when Silicon Valley Bank stuff happened, that's FDIC on the bank side, on the brokerage side, the same thing. Fdic or the equivalent to that is SIPC, s-i-p-c. So FDIC or the equivalent to that is SIPC S-I-P-C. So you have that insurance which is just like federal insurance.

Speaker 1:

Now these institutions aren't just going to have that coverage. Typically, they're going to have insurance that they go out and get. Beyond that there's going to be excess SIPC insurance. So, for example, charles Schwab, with their SIPC coverage and their excess SIPC coverage, they're providing protection of up to an aggregate of $600 million I'm reading this right from their website Limited to a combined return of $150 million per customer, up to $1.15 million of which might be in cash. So let's assume Charles Schwab goes under Unless you have an excess of $150 million of securities there, unless you have an excess of $150 million of securities there and now this is more like dealing with fraud stuff is what a lot of this insurance is for. Like, what if something fraudulent happens? What if the company goes under? What if there's some crazy thing that happens? There's going to be insurance that covers that. So, unless your asset base there is so incredibly high we're talking about hundreds of millions of dollars you're probably going to be fairly protected fully protected at these institutions.

Speaker 2:

We had someone who reached out and they were very transparent. They said look, I really think I should work with you guys because of the holistic approach, but I'm worried. You guys seem like a smaller company. I mean, I know you're managing a billion dollars in assets now, but it's still. There's these big firms Wells Fargo, I hear these names. My wife feels better.

Speaker 2:

So now, even though I think you guys maybe add more value, I have to go explain this to my wife. So I'm happy to work with you guys. I just want you to guarantee my money will be safe. And I said look, if someone guaranteed that I had surgery and nothing would go wrong, I'd be skeptical of that person. You cannot guarantee anything, but you can feel very confident and do your due diligence and research. And that's the approach here. And I've heard you say in a meeting before James and there was a I forget the name of the couple, but you were like, hey, listen, if Charles Schwab went under there, there'd be bigger problems in the world. And so because of that, like we have to make sure we're investing our money. We have to be smart as to where our money is. But there becomes a level here where we have to trust institutions are doing the right things and the checks and balances are where they should be.

Speaker 1:

Yeah, and I think, at the end of the day, regardless of what happens to Charles Schwab, to Fidelity, to Altruist, to Betterment, to any of these institutions, simply splitting your money between them in no way improves your financial strategy, in no way improves your diversification. To use the absurd example we used at the beginning, I don't care if all of your money is in Tesla, if it's held at multiple institutions. There's no extra diversification. You're getting there. So it's really trying to pull people back and saying, yes, you want to make sure your money is safe, you want to make sure your money is protected, you want to make sure it's a reputable, a great organization with the right levels of insurance where your money can be kept safe. But that alone, even if you could fully guarantee it up to an infinite number of dollars of protection, that's not guaranteeing true diversification.

Speaker 1:

So focus on what really matters. Don't have single stock risk, don't have concentration risk, don't have asset allocation risk or asset class risk. There's all kinds of risks that we didn't even go over Market risk, credit risk, liquidity risk, reinvestment risk. Some of these have to do with stocks, some with bonds, but focus there. Focus on designing the right portfolio to meet your needs that eliminates the relevant risks, and then the actual decision of the institution to hold. For the most part, they're all going to be pretty solid in terms of having enough or sufficient coverage for almost anyone's actual portfolio needs.

Speaker 2:

Exactly Now. I do want to say and this is very important the fact that client of ours had 70 or so accounts. I would like to see, James, a photo of you with 70 grocery carts, with a small piece of food and all of them. I just want to see you trying to manage that. So we're going to put the photo right here.

Speaker 1:

No, I'm just kidding, because you're exactly right when it's a good visual. If you assume that you could get the exact same produce exact same milk, exact same groceries for the exact same price at one institution over another, because that's essentially what you have when you have these major brokerages you can get the same products at the same price with the same insurance coverage. Sure, the interface is different. In the same way, if you go to Ralph's, it's different than Albertson's, the interface is different to get it, but you're more or less getting the same thing. So what's the benefit of going to Albertson's than Ralph's and Kroger's and Whole Foods to get four different things when you can go shopping at one place and get it all done? So, at the end of the day, diversifying your institutions is in no way moving you closer to your goals. Yeah, it's something that should be considered, but it's not moving you forward.

Speaker 2:

And part of our job doing this show is to tell you guys a hundred things not to worry about. So some of you are all at fidelity right now going. Am I not diversified properly? And you just heard you very well, maybe, maybe you want to look into sector risk or a few other things we discussed today, but you might be like, oh so, like I was about to open new accounts because you know my neighbor sort of freaking me out that I should have more institutions and now you don't have to. So that's part of our job, awesome.

Speaker 1:

Anything else, Ari, that you would add? That's it. Cool. Follow the show Root Financial on YouTube. You can also listen to it on my podcast and Ari's podcast. A lot of you are probably listening to it right there, but for those of you listening on podcast, follow along with YouTube and that's it.

Speaker 2:

We'll see you all next time and see you on Instagram, and so if you need to see us on Instagram, you can see early retirement Ari is where you can find me. And then James, I believe you are just James Canole James.

Speaker 1:

Canole on Instagram, on LinkedIn. Come follow us. More stuff to come See you guys. Thanks everyone. The information presented is for educational purposes only and is not intended as an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies. Investments involve risk and are not guaranteed. Any mention of rates of return are historical and illustrative in nature and are not a guarantee of future returns. Past performance does not guarantee future performance.

Speaker 2:

Viewers are encouraged to seek advice from a qualified tax, legal or investment advisor professional to determine whether any information presented may be suitable for their specific situation Once again.

Speaker 1:

I'm James Canole, founder of Root Financial, and if you're interested in seeing how we help our clients at Root Financial get the most out of life with their money, be sure to visit us at wwwrootfinancialpartnerscom.