Portfolio diversification is commonly viewed as a way to grow your nest egg while minimizing your risk. Having exposure to many industries and stocks is viewed as a way to counter risk, but it can also hurt your long-term returns. It’s no wonder legendary investor Peter Lynch referred to it as “diworsification,” which involves overdiversifying your portfolio and minimizing potential gains in the process.
One person came across diworsification when seeing what their wealth management firm was doing with their portfolio, and this person shared the entire story on Reddit.
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Here’s What Happened
The Redditor’s family uses a wealth management firm that handles investments for them, and now that the Redditor is old enough, they are getting “more and more control over portions of the family money.”
However, the Redditor wasn’t impressed with the wealth management firm’s investments that were spread across “large caps, mid caps, small caps, international large and small caps, emerging markets, and in these closed funds that you couldn’t just look up on the internet, and lots of different ones.”
The Redditor lamented that it took a lot of work to figure out which funds were doing well and which weren’t. None of those funds beat the S&P 500, a popular benchmark that funds like the Vanguard S&P 500 ETF (NYSE:VOO) have used to deliver high long-term returns for investors.
While the S&P 500 is also a well-diversified benchmark, it has outperformed each of the funds that the wealth management firm offers. The Redditor believes that exiting those funds and putting everything into an S&P 500 ETF would streamline their investments.
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The S&P 500 Is Hard To Beat
When most people talk about outperforming the stock market, they are talking about the S&P 500. This benchmark contains 500 of the largest U.S. corporations and periodically replaces underperformers with rising stars.
“I diversified quite a bit early on in my investing life and realized after five years or so that the S&P 500 is tough to beat over time,” one commenter said.
Another commenter suggested that everyone should get started with VOO, further demonstrating how reliable the S&P 500 has been in the long run.
It doesn’t make sense to stick with a collection of funds that have all underperformed the S&P 500, while paying high fees to hold those funds and work with the wealth management firm. Meanwhile, VOO is a passively managed S&P 500 ETF that only has a 0.03% expense ratio. You get to keep almost all of your money and produce returns on par with the stock market without any headaches.
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Think For Yourself
Multiple commenters said that it’s normal for Wall Street and financial firms to take advantage of people who don’t review the numbers. While VOO, with its 0.03% expense ratio and long-term returns, makes more sense than underperforming funds with high fees and an expensive wealth management firm making decisions for you, not everyone takes the time to review those details and compare options.
“A lot of people also just don’t want to simply bother and have been convinced it’s beyond them,” one commenter said. “And many advisers, instead of empowering them, just let them wallow in that belief.”
“The ignorant customers are wealth managers’ bread and butter,” another commenter said. The complexity theater of making simple things complicated, like ‘tactical allocation and rebalancing,’ furthers this inertia. Savvy operators like you are not their intended client base because there’s less of an information asymmetry. If anything, you’re a risk to their business model, which is based on control, opacity, and behavioral leverage.”
Letting Wall Street and wealth managers do the thinking for you can be quite expensive. Not only will you have extra fees, but you may also miss out on compelling long-term returns.
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