Landmine #16: Diversifying Advisors

Let’s talk a little bit about gold and what you should be looking for as it continues its attempted recovery from last week’s 13% fall, which was its biggest fall in a short period of days since the 1980’s.

So first let me remind you that gold is driven by 3 things:

  1. Fear Of Future Inflation
  2. Distrust of Government
  3. Geo-Political Instability

The first thing to note about all of those things is that none of them have changed in the last 12 years since gold started its 800% run from $200. So, if you already own gold, what should you do? Well last week, I hinted that there are some pretty interesting ways that you could be able to continue to own gold, while creating some downside protection if it starts to fall again. My team and I at Concert Wealth Management use these structures for many different types of investments, and gold is no different. If you want some specifics on how these instruments are structured you can reach out to me, and I can give you the specifics off-air. But I will tell you, anytime you build a strategy that limits your downside, you are almost always asked to also cap your upside potential, and that is why I am dragging my feet on hedging my gold position just yet. Since the drop on April 11th that lost 13% in 2 days, gold has been on a steady recovery and has made back about half of what it lost, so I am hesitant to cap that bounce. Also, gold has resistance at about $1449 per ounce, which it is testing as we speak, so I think you take a wait and see strategy here to see if it breaks through resistance and holds.

Now I want to give you another landmine from my book (in-progress) which, as you know, is all about avoiding hidden dangers under the surface of your investment portfolios and disarming them before they explode.

Landmine #16 Diversifying Advisors

This is a controversial one because many people are told to “never put all of your eggs in one basket”, and while there may be some truth to that, I’m not sure if it applies to relationships as much as it does individual investments. Here’s where I am going with this one…a survey was done a while back that showed that the average investor had three active advisor relationships. Now while this may not be surprising to you, let’s see how this approach can turn into a landmine. The very goal of diversification is to spread risk, so on the surface, it might seem logical to have a bunch of advisors bringing you ideas and strategies, but several things can go wrong with this approach and create a landmine. The first one is overlap. Overlap is when you think you are spreading out your risk, but you actually end up owning many of the same positions in multiple accounts. In other words, you might have three advisors recommending three different portfolio designs, but the top positions repeat themselves in each account giving you more risk than you thought you had in those overlapped positions. The problem is, because you have likely created a competitive environment between your advisors, you are probably not sharing your holdings with all of them, so everyone is operating in a vacuum and has little idea of what the others are doing. So let’s say back in 2008 you had three advisors who were running what looked like three different portfolios, and maybe you had a bunch of mutual funds or third party money managers throughout these three relationships and you had a high concentration of bonds that paid a great rate of return and happen to be linked to sub-prime mortgage pools? You see how that could really hurt you?

So what should you do? How can you disarm this landmine before the next crash? Well, you have 2 choices:

  1. Start Sharing
  2. Pick one advisor who you trust

photo credit: huppypie via photopin cc

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