Diversifying your assets is an important move. It's important to invest in different areas and to have a diverse portfolio of investments.
In short-- don't put all your eggs in one basket.
If the Great Recession taught us anything, it's that you never know which one of your assets could take a plunge in value. Assets can move in tandem and that's not something you want happening in your portfolio, writes U.S. News.
The tandem effect (i.e. assets growing or declining together, in the same direction) typically happens when your portfolio deals in too many similar assets. So investing in real property and with mortgage lenders can leave a hole in your portfolio if the housing market tumbles, like it did in the Great Recession, says U.S. News.
You might ask: Why is any of this important to estate planning? After all, a financial planner or an investment planner will plan your investment portfolio but an estate planner just drafts documents, right?
So what does an estate plan have to do with portfolio diversification and investments?
Investments could come in to play while planning your irrevocable trusts. When planning your estate, you might plan for future generations by setting up an irrevocable trust. While you might fund the trust with an initial dollar amount, these trusts might also invest in particular assets. In fact, it is typically the trustee's duty to manage the trust funds and to ensure that the trust assets are properly invested.
Another place where this matters is in a self-directed IRA. When directing your IRA to invest, you want to be cautious about where those funds are invested. A self-directed IRA is one in which you retain the ability to direct its investment.
Of course, there's overdiversification, too. The problem with over diversification is the investment costs associated with owning several funds over several markets. So according to U.S. News, the trick isn't to own as many different securities as you can: it's to own a variety of assets across various risk levels. Or essentially, to spread your assets and investments across different classes.
While it's not the job of your estate planner to help you figure out your investment strategy, it is your job to make sure that you do your homework when contemplating how you want to plan your assets.
- Search Directory of New York Estate Planning Lawyers (FindLaw)
- Beware of Formula Clauses and Estate Tax Uncertainty (New York Estate Planning News)
- Types of Trusts (FindLaw)