Having money spread across several accounts can create an impression of broad diversification. Michael L. Niemczyk brings attention to why the number of investment accounts someone owns may reveal relatively little about how diversified the overall portfolio actually is.
Over a career, it is common to accumulate assets in different places. A worker may participate in multiple employer retirement plans, establish individual retirement accounts, and maintain taxable investment accounts. Although these accounts have different statements and providers, the investments inside them may be surprisingly similar.
Understanding diversification therefore requires looking beneath the account labels and considering the portfolio as a whole.
Multiple Accounts Can Hold Similar Investments
Imagine someone with an IRA, a former employer retirement account, and a separate investment account.
At first glance, three accounts may appear to provide diversification.
However, each account could contain investments with substantial exposure to the same companies, industries, asset categories, or market segments. Owning them through different accounts does not necessarily reduce that overlap.
The distinction is important because diversification concerns what an investor actually owns rather than simply where those assets are held.
A household-level review can reveal relationships that may not be obvious when each statement is considered independently.
Account Labels Do Not Describe Investment Exposure
Retirement accounts are sometimes discussed as though the account itself were an investment.
An IRA, for example, is an account structure. The investments held inside determine much of its market exposure.
Two IRAs can therefore have completely different investment characteristics. Likewise, an IRA and an employer-sponsored retirement account could hold very similar investments.
When reviewing diversification, it can be useful to move beyond account names and ask broader questions.
What types of assets are represented? How concentrated are the holdings? Are several funds providing exposure to many of the same securities?
These questions provide more information about diversification than simply counting accounts.
Investment Overlap Can Be Easy to Miss
Overlap becomes particularly difficult to recognize when someone owns several funds.
Different fund names can create the appearance of variety even when their underlying holdings share significant similarities.
For example, multiple funds may each hold many of the same large companies. Another collection of funds may concentrate heavily on one part of the market despite having different investment labels.
This does not automatically mean overlapping investments are inappropriate.
The important issue is whether the overlap is understood and consistent with the investor’s intended strategy.
Without reviewing underlying exposure, concentration can develop unintentionally.
Old Workplace Accounts Can Change the Bigger Picture
Changing employers can contribute to portfolio complexity.
Someone may leave retirement savings in a former employer’s plan while beginning contributions to a new workplace account. Years later, additional accounts may be added.
Each decision can make sense individually while gradually creating a collection of investments that was never designed as one coordinated portfolio.
That can make retirement an especially useful time to evaluate the entire picture.
The objective does not necessarily have to be reducing the number of accounts. Instead, it is understanding what those accounts collectively represent and whether their combined investment exposure remains aligned with current goals.
Diversification Extends Beyond the Number of Holdings
Owning many individual investments does not necessarily guarantee meaningful diversification either.
A portfolio might contain numerous holdings while remaining concentrated within a particular sector or investment category.
Diversification generally involves spreading exposure rather than simply increasing the number of positions.
Investors reviewing a portfolio can consider several dimensions, including:
- Different types of assets.
- Exposure across industries or sectors.
- Concentration in individual holdings.
- Domestic and international exposure, when applicable.
- The relationship between growth-oriented and more conservative assets.
- How the overall mix corresponds with financial objectives.
The appropriate combination depends on individual circumstances, goals, time horizons, and tolerance for investment risk.
Retirement Can Make Coordination More Important
During working years, retirement accounts may primarily receive contributions.
After retirement, some of those accounts may begin supporting withdrawals.
That transition can make the relationship among investments more noticeable.
If several accounts contain similar assets, market movements may affect a larger portion of the household portfolio in the same way than the account count initially suggests.
Retirees may also need to think about liquidity and the timing of withdrawals alongside diversification.
Viewing the accounts together can make it easier to understand which assets are serving near-term needs and which remain invested for longer-term objectives.
Diversification Does Not Eliminate Risk
Diversification is commonly associated with managing investment risk, but it should not be confused with eliminating risk.
Investments can decline in value, and diversified portfolios can experience losses.
Diversification is instead one way of avoiding unnecessary dependence on a narrow collection of investments or market exposures.
This distinction matters because adding another account or another fund does not automatically make a portfolio safer.
The underlying investments still determine how the portfolio responds to changing market conditions.
Understanding what is owned remains more important than accumulating additional account statements.
Portfolios Can Drift Over Time
Even a portfolio that began with a deliberate allocation may change.
Different investments grow or decline at different rates. As a result, certain portions of the portfolio can become larger or smaller without the investor intentionally changing the strategy.
Personal circumstances can change as well.
Retirement may be approaching. Income needs may shift. Financial goals can evolve, and an investor’s willingness or ability to accept certain risks may differ from what it was years earlier.
Periodic reviews can help identify whether the portfolio still reflects the strategy it was intended to follow.
Look at the Household as One Financial Picture
Diversification can become even more difficult to evaluate when spouses maintain separate retirement and investment accounts.as
Each person’s portfolio may appear balanced individually while the household’s combined holdings reveal significant overlap.
A broader review can help answer questions such as:
- Where is the household most heavily invested?
- Are multiple accounts holding similar investments?
- Has one area become unusually concentrated?
- Does the combined allocation reflect current retirement objectives?
- Are near-term and longer-term needs being considered together?
This perspective can provide information that individual account reviews may miss.
More Accounts Are Not Necessarily a Problem
The lesson is not that investors should avoid having multiple accounts.
Different accounts can exist for legitimate financial, retirement, tax, or personal reasons. Nor does diversification require every account to contain entirely different investments.
The issue is coordination.
When accounts build up gradually over decades, it can be easy to overlook the portfolio they create together.
A periodic review can reconnect those separate pieces and clarify how the complete investment strategy is structured.
Final Thoughts
True diversification cannot be measured by counting accounts, funds, or statements.
A person may own several investment accounts and still have substantial exposure to the same areas of the market. Conversely, a carefully coordinated portfolio can use multiple accounts while maintaining an investment mix designed around broader objectives.
Looking at underlying holdings, identifying unintended overlap, considering household-wide exposure, and periodically reviewing allocation can provide a clearer understanding of the portfolio.
Ultimately, the question is not how many accounts someone has accumulated. It is whether the investments inside those accounts work together in a way that reflects the investor’s current financial circumstances and longer-term goals.
Personalized financial and tax planning, as well as investment advice, can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Please contact the firm for further information.
Advisory services offered through Michael Niemczyk Associates, Inc., an Illinois and Wisconsin state-registered Investment Advisor and Capital Advisor Network (CAN), are separate and unaffiliated investment advisory firms. Capital Advisor Network (CAN) is an SEC-registered investment adviser. Registration with Illinois and Wisconsin does not imply a certain level of skill or expertise. Additional information about Michael Niemczyk Associates, Inc. is available in its current disclosure documents, the Form ADV and the Form ADV Part 2A Brochure; each is accessible online via the SEC’s Investment Adviser Public Disclosure (IAPD) database at https://adviserinfo.sec.gov/firm/summary/124000. Michael Niemczyk Associates, Inc., does not offer or provide legal advice. Please consult your attorney for such services.