FISCAL FITNESS

MICHAEL J. DONNELLAN King Financial, Inc.

DIVERSIFICATION

Diversification has been called “the only free lunch in finance.” A lot of hard data illustrate the benefits of building a portfolio that’s diversified across asset classes and investment styles, and dividing your eggs across multiple baskets has commonsense appeal, too. If you don’t know whether stocks will continue their current run or take a breather, if small caps will outperform large, or when interest rates will start to rise – and no one truly knows those things – diversifying is a sensible way to hedge your bets.

Most investors only think of diversification as the construction of their portfolios. Investors could benefit by construing it even more broadly. Here are some examples of diversification interpreted more broadly.

TIME DIVERSIFICATION What if you are concerned about the timing of your purchase? If you buy at the wrong time, when the asset is richly valued and could be due for a fall, you could lose part of your money right out of the box. In such instances, dollar-cost averaging – or diversifying your purchases by buying smaller pieces of the investment at multiple predetermined intervals rather than adding a position all in one go – can be a good strategy. Of course, there are no guarantees – you might buy an investment that subsequently goes up and up and up, in which case you would have been better off buying the position all at once. But the bottom line is that you don’t know what it will do, so diversifying your purchases across multiple time frames helps accommodate a range of outcomes. continued on page 14

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The same concept holds true for any investment that offers a fixed payout, such as an annuity or individual bonds or CDs. You may be able to obtain a higher rate down the line by waiting, particularly if interest rates go up, but it’s hard to know that for sure. Laddering your purchases across multiple time frames can give it exposure to multiple interest-rate environments and increases its potential for higher payouts down the line.

TAX DIVERSIFICATION Diversification of tax treatment is another way to spread your bets around, and that’s why I’ve been urging investors to obtain Roth treatment for some of their retirement assets.

I don’t know for sure that tax rates in general will go up (though there are certainly good reasons to expect that they might). Nor do I have a clue about whether any of you will be in higher or lower tax brackets in the future.

If you’ve been working, saving, and investing, your retirement assets will be taxed when you begin taking withdrawals – whether you hold the money in traditional IRAs, SEPs, Simple Plans, 401(k)s or other company retirement plans. For that reason, it’s a good strategy to get at least some of your retirement assets into the tax-free withdrawals column—in a Roth IRA. VEHICLE DIVERSIFICATION Most investors’ portfolios are constructed with individual stocks, mutual funds or ETFs, or actively managed funds. Adding a slice of a passively managed index fund or ETF to a portfolio anchored in actively managed funds can help improve the portfolio’s risk/reward profile, according to many studies. Broad stock-market index funds and ETFs can also be the better choice for your taxable accounts because they tend to distribute few capital taxable gains on a year-to-year basis.

By the same token, index enthusiasts might consider steering at least a small share of their portfolios to actively managed funds with sensible strategies and low costs.

“ALL-IN” DIVERSIFICATION Most of this article has focused on various levels of diversification when it comes to your investment assets. But diversification can also be a useful concept when thinking about your total money picture: any real estate or business interests you own, for example, as well as the stability of your own earnings.

For obvious reasons, if a lot of your personal wealth is tied up in your home or business, a big priority for you should be to diversify into more liquid assets that have little correlation with real estate or with your firm. Creating a net worth statement can help you get your arms around how well-balanced your whole portfolio is.

Talk to your financial and tax advisors to determine your specific needs and goals.

Michael J. Donnellan specializes in stock selection and retirement planning. Contact him with any questions or comments at the M3 Wealth Management office at: 17601 W. 130th Street – Suite 1 in North Royalton, Ohio. Phone number (440) 652-6370 Email: donnellan@m3wealthmanagement.com

Securities & advisory services offered through L.M. Kohn & Company Registered Broker/Dealer Member FINRA/SIPC/MSRB 10151 Carver Rd. Suite 100 – Cincinnati, Ohio 45242 (800) 478-0788

The M3 Wealth Management Office does not provide legal or tax advice. Consult an attorney or tax professional regarding your specific situation. The information herein is general and educational in nature and should not be considered legal or tax advice.

Scenarios illustrated are hypothetical in nature, results may vary. Investing is subject to risk which may involve loss of principal. Past performance is not indicative of future results.

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