personal finance  |  june 4, 2021

How to Make Your Household Financially Diversified

Reviewing your portfolio as a household can help reveal unintended overlap and ensure that you’re on track to reach your shared savings goal.

 

Key Insights

  • Discussing your financial goals as a couple can help ensure your financial plan works for both of you.

  • Your financial plan can incorporate different risk tolerances and time horizons as necessary.

  • Reviewing your portfolio for unintended overlap can help maintain appropriate diversification.

Judith Ward, CFP®

Senior Financial Planner

Roger Young, CFP®

Senior Financial Planner

While you may make individual choices about your retirement savings contributions, asset allocation, and account types, it’s equally important to consider your overall investment approach—and level of diversification—as a couple. A well-diversified portfolio can help ensure that your assets are invested appropriately for your financial goals.

Evaluating your assets as a household can help reveal an unintended overlap of investments. It can also increase the likelihood of achieving your shared financial goals and ensuring that your savings will last through retirement. “Having both partners involved in planning, as well as contributing to savings, helps everyone feel confident in the pursuit of financial success,” says Roger Young, CFP®, a senior financial planner with T. Rowe Price. “These conversations can help couples become more knowledgeable and invested in their future together.”

A Shared Vision—and A Shared Plan

Take time to discuss the details of your financial future as a couple. Identifying your shared, long-term financial goals—including retirement—can help you lay out a plan that addresses the needs and concerns of both partners. “Individuals often have their own intentions in mind for retirement, but they don’t necessarily communicate it to their spouse,” says Judith Ward, CFP®, a senior financial planner with T. Rowe Price. “You need to make sure you and your spouse share a vision and agree to compromises as necessary.”

As you discuss your long-term plans with your spouse—along with how much income you may need in retirement—keep in mind that there is a high probability that at least one of you will live into your 90s. For a 65-year-old couple in average health, there is a 50% chance that at least one spouse will live to age 92.* Even if you and your spouse have different time horizons for your respective goals, the key is to determine when you will need to start drawing on your retirement savings for income and how long you may need your savings to last.

Analyze Your Asset Allocation

With time horizons in mind, you can determine an appropriate asset allocation target both as individuals and as a household. “While your allocations may vary, they shouldn’t be at odds with one another,” says Young. “For instance, discussing your respective risk tolerances can help you build a portfolio that works for you as a household.” Remember that the closer you get to retirement, the more you’ll want to hold in bond investments.

You may find that you can set a compromise allocation target that works for you both. For instance, if you and your spouse are both 50 and you expect to retire at age 65, you might consider a target allocation for your household of between 65% and 85% of your retirement savings in equities along with 15% to 35% invested in bonds. While your overall allocation should reflect your shared goals, you could still set different allocation targets for different accounts to better reflect your individual risk tolerances. A benefit of each partner being comfortable with the risk in his or her own accounts is that they are less likely to stray from the plan in times of volatility.

Keep in mind that the goal is to ensure that one spouse’s portfolio allocation choices are not working at cross-purposes to the other spouse’s choices. Agreeing to complement each other with different allocations is one thing. Independently setting radically different allocations could result in portfolios that don’t work well together.

For instance, an account with an aggressive allocation to small-cap stock mutual funds might seem appropriately balanced when combined with an account that is invested very conservatively in bond funds. However, this approach could leave the overall portfolio with too little exposure to important moderate risk categories. The key is to remain in open communication with your spouse about your investment decisions.

The Importance of Diversification

Exposure to different areas of the economy can help increase your portfolio’s level of diversification.

Diversification can help manage risk in your portfolio by avoiding a concentrated exposure to a single asset class or subset of the economy. Building a diversified portfolio is about more than finding an appropriate balance among stocks, bonds, and short-term investments, however. Your portfolio needs varied exposure within each major asset class as well.

Diversify across stocks by:

  • Market capitalization (e.g., small- and large-cap)
  • Sectors and industries
  • Regions
  • Investment styles (e.g., growth and value)

When it comes to bond investments, vary your:

  • Credit qualities
  • Regions
  • Types of issuers (U.S. and international, government and corporate)

Diversification cannot assure a profit or protect against loss in a declining market.

Diversify, and Look for Hidden Concentrations

As part of the process of checking that your retirement accounts are properly allocated between stock and bond mutual funds, consider whether you are both unintentionally heavily invested in the same underlying investments. This exercise is particularly important if you have large holdings in individual stocks themselves, perhaps due to company stock holdings in an employer-based retirement plan. When you look at your overlap and concentrations, a rule of thumb might be to make sure you’re not holding any more than 10% of your portfolio in any particular industry or company, in which case underperformance could have a large impact on your retirement savings as a household. (See “The Importance of Diversification.”)

Fortunately, there are tools, such as Morningstar Instant X-Ray®, that allow investors to analyze their portfolios for this potential overlap. This analysis can help determine whether you and your spouse are overexposed to a specific company, sector, region, or even investment style, such as growth or value investing. (See “Identifying Fund Overlap.”)

This review process can also help you identify whether you are invested in more mutual funds than necessary. For instance, investing in several funds that target a specific sub-asset type, such as large-cap stocks, may not provide additional diversification benefits.

If you have managed to properly diversify across multiple accounts, your broader portfolio may look complex. Consider streamlining your holdings across your various accounts so that you hold only what you need to ensure adequate diversification; doing so can help you manage your portfolio more easily over time.

Streamlining can be particularly important in the years leading up to retirement when you need to develop an income plan that takes into account the tax treatments and disposition of assets across multiple account types, such as Roth and Traditional individual retirement accounts and taxable general investing accounts. “Having multiple account types can give you more flexibility when taking withdrawals in retirement; at the same time, duplicative investment holdings could cause unnecessary complexity,” says Ward.

Identifying Fund Overlap

An online tool can make it easier to gauge overlap in your investment portfolios.

One potentially useful tool for identifying overlap is Morningstar Instant X-Ray®.* After entering the ticker symbols for each mutual fund and U.S.-based stock you hold, as well as cash and bond positions, you’ll receive a breakdown of the underlying holdings based on various factors, including size (e.g., small-, mid-, and large-cap) and various strategies (such as growth and value). Morningstar Instant X-Ray® includes diversification across industries, stock types, and even global regions. Review the output to look for any areas that are overly concentrated or for any gaps in exposure. Doing so can help you determine if you are exposed to any unexpected risks.

Morningstar Instant X-Ray® is an exclusive benefit for T. Rowe Price Personal Services and Enhanced Personal Services clients and can be accessed through the T. Rowe Price account login.

What To Do Next

If you identify imbalances in asset allocation, overlap in your own portfolio, or overlap between your portfolio and that of your spouse, pare back some of your concentrated holdings. You can invest the proceeds in an area where your combined portfolios have less exposure. Just be sure to keep the tax implications of these moves in mind. “If there is a way to meet your goals by making changes and adjustments to your allocations in the tax-advantaged accounts, that might be a better approach than realizing a large gain in a taxable account,” says Young.

Going forward, the process of maintaining an allocation and a level of diversification that meet your needs as a couple will require ongoing review. While a deep dive into the plan is only necessary periodically—perhaps every few years—it is valuable to review your overall allocation each year.

Moving Forward Together

Of course, you’ll want to carry this collaborative effort beyond the question of diversification to ensure that your broader financial plan reflects your combined goals. For instance, take the time to review your contribution rates as a couple and develop a joint retirement income plan that reflects both of your needs. This plan should include strategies to make the most of your Social Security benefits as a couple. “Taking the time to look across your accounts as a household helps ensure that you’re both doing as much as you can to reach your individual and shared goals,” says Ward. “By discussing your combined vision and working together to achieve it, you can strengthen both your relationship and your financial confidence.”

Call 1-800-225-5132 to request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information you should read and consider carefully before investing.

*Society of Actuaries Longevity Calculator (longevityillustrator.org). Calculation assumes a man and woman born 10/21/1955, nonsmoking, and with average health.

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This material has been prepared for general and educational purposes only. This material does not provide recommendations concerning investments, investment strategies, or account types. It is not individualized to the needs of any specific investor and is not intended to suggest that any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.

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