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How diversified do my and my husbands portfolios need to be?

My husband and I keep our finances fairly separate and split up our bills and whatnot. We have our own individual investing portfolios and I'm wondering how much we should aim to diversify not only our own investments, but in regards to each others investments as well. Should we be looking at our investments as one lump together and diversify accordingly or do the same types of diversification within our individual portfolios?

Apr 30, 2012 by Mia from North Bergen, NJ in  |  Flag
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12 votes

Hi Mia...This is a great question..at the risk of sounding redundant I would recommend consulting with an investment professional to determine what is the best course of action for your family. There are advisors who charge by the hour or assets under management. So your options are many. Only through a personal interview can it be determined what is best. Each individual and individual family are different so please take the time and money to find YOUR solution. Good luck.

Comment   |  Flag   |  Apr 30, 2012 from Green Bay, WI

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9 votes

Hi Mia, to be consistent with your other financial arrangements, it sounds like your portfolios should be separate also. But you can still have the same levels of diversification within each of your portfolios; by doing so, you in essence still arrive at one overall level of diversification. For instance, if your portfolio is 60% in stocks and 40% in bonds, and your husband's is also 60/40, then on an overall basis you guys combined are 60/40 stocks/bonds.

Where it may get interesting for you is whether you have individual investment goals, or whether you have joint investment goals (or some of each!). To the degree you have different goals (maybe one of you really wants to save for retirement, the other wants to save for a child's college education), then your portfolio diversification may differ between the two of you.

For your joint goals, I'd say look at the investments dedicated to those goals as just "one" portfolio and thus one target diversification. If you have separate, individual goals, then you might need indivdual target diversifications for each. Mike

Comment   |  Flag   |  Apr 30, 2012 from Orland, IN

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7 votes

There are costs and benefits for either solution.

The costs. If your portfolios are invested with the same goal(s) in mind, you may be duplicating or adding costs to the overall portfolio. You will potentially duplicate hard costs such as transaction fees. You may be incurring additional costs that are not as transparent. If you both have taxable and tax deferred accounts, you may want to place the less tax friendly asset classes in tax deferred accounts to avoid higher taxation on dividends and interest. This may not be applicable if you both have either all tax deferred accounts or an equal proportion. Two portfolios may mean more rebalancing which potentially adds to your transaction and tax costs.

If you are building the portfolio with the same goal in mind (example: retirement), you may decide to build a portfolio with 60% equity and 40% bonds (in total). Let’s assume you both are contributing to a 401k plan (or equivalent) that has different investment choices. Ideally, you would choose the best options in each plan and fill in the remaining asset classes in your other accounts. By separating, you may need to choose a subpar investment choice which is potentially a cost on performance.

If you are investing to meet a similar goal, separate accounts add complexity when measuring the likelihood of reaching future financial goals. If you are working with an investment advisor, you may be adding cost via additional hours and if you are self managing, you may be costing yourself additional time working on your investments when you could be working on more enjoyable things.

The benefits. Many couples struggle with different risk tolerance levels. Your current solution may allow each to invest without the emotional “cost” of taking too much or too little risk when compared to the other portfolio. Because I work with divorcing couples, I can see the benefit of having separate accounts if something were to happen to your marriage. Unfortunately, the statistics show this is a possibility. By the way, separate accounts will only help if the two of you worked together during the divorce process.

In the end, if you plan to invest towards a common goal and are comfortable working together to achieve the goals, I feel you would gain (financially) from a combination of portfolios. But, you need to do what is best for you. Interesting question. Thank you.

Comment   |  Flag   |  Apr 30, 2012 from Phoenix, AZ

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3 votes

Great question to which there are no simple answers. Let's break it down into two parts; First are you both properly diversified? There are many people who own a multitude of funds and believe they are properly diversified, unfortunately this is often an incorrect assumption. Each portfolio should be globally diversified for both stocks and bonds. This means having a mixture of large, mid size and small companies in the US, developing markets and emerging markets. ( to what degree depends on your risk tolerance). The same should be true for you bond portfolio as well. For a template go to the Dimensional Fund Advisors website, dfaus.com, then strategies and take a look at the component funds. They are about as diversified as one can get for stock exposure.

The next step would be to determine if you have enough money to meet your goals, if not how much do you need to save and what rate of return do you need to meet those goals? It is more important to complete this process than any investment you will ever choose. Only 22% of Americans age 55 and older have accumulated more than $250,000 in their 401k accounts! Smart money.com has a pretty easy retirement calculator.

2 Comments   |  Flag   |  Apr 30, 2012 from Cleveland, OH
Mike

Do you plan on spending the money together? If so, then invest together. Together you can create a truly diversified portfolio without redundancies that well occur if you invest separately.

Flag |  May 01, 2012 near Thornton, PA
Ryan

Mike - that seems like a good approach, but I wonder if it makes rebalancing a little bit more difficult because now you are rebalancing across multiple portfolios.

Flag |  May 01, 2012 near San Diego, CA

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