Standing in the candy aisle before Easter feels like managing a portfolio. There are so many colorful choices, shiny wrappers, and promises of satisfaction, but filling your basket with everything just because it looks good? Not the best idea.
When shopping for Easter candy (just for my kids, of course), I like to think about what works with what. Do Peeps and Cadbury Creme Eggs work in tandem or against each other? Do malt chocolate Mini Eggs correlate negatively with Jelly Belly Beans? Take a homerun swing and go all-in with a HUGE chocolate bunny? Should I diversify my choices haphazardly and hope that neither I nor my kids get sick from ingesting it all at once? Or should I be more tactful in my decision-making? Tailor a plan to each individual?
Well, everyone who’s a parent knows I won’t stop my kids from being too diverse in their candy bingeing. Still, there is a term in finance called diworsification, yes, it’s as awkward as it sounds, and no, Elemer Fudd didn’t come up with it. The term was coined to describe spreading investments across too many holdings. Diworsification can lead to diluted returns and unnecessary complexity. While diversification aims to reduce risk, over-diversifying makes it hard to track performance and reduces the potential upside of your investments.
Diworsification: The Candy Aisle of Investing
You want balance in your basket, to keep with this easter candy analogy. A chocolate bunny, a couple of marshmallow Peeps, and a pack of jelly beans? Great. But add stale black licorice, sour gummy worms, and some type of elderly hard caramel, and now you’re just filling space. Too many redundant or unhelpful holdings in a portfolio do the same thing: crowd out your winners and make the portfolio harder to manage.
We see this often when people follow overly rigid allocation rules like the 60/40 stock-to-bond ratio. That might be a decent starting point, but your goals, timeline, and tolerance for volatility should guide your allocation. For one client, a 63% stock allocation is what we calculated as the lowest risk portfolio needed to be on track for their goals. It made far more sense than sticking to a one-size-fits-all rule of thumb. Their long-term goals were growth-oriented, while short-term needs called for stability. Each person/family will be at a varying stage of their needs, so rigid portfolio percentages are unoptimized.
The Role of Each Account (and Each Candy)
Let’s reframe this idea of purpose-driven investing through the lens of my Three-Bucket strategy. Imagine your Easter basket as your retirement plan; each treat or investment account should serve a different role, just like each type of candy satisfies a different craving.
The Cash Bucket is like the treats you reach for first, the essentials. Your liquid assets are things like cash, short-term bonds, and money market funds. They cover a few years of expenses and help you avoid selling your investments in a downturn. Jelly Beans fit the cash bucket profile well.
The Income Bucket is the middle layer of your basket. Consider these reliable favorites that sustain you over time: conservative investments like dividend-paying stocks, high-yield bonds, and CDs. They provide consistent income without too much risk. Think Cadbury Creme Eggs or the dependable chocolate bunny.
The Long-Term Growth Bucket is your portfolio’s high-risk, high-reward candy, the gourmet chocolate you stash away for a special moment. It is where stocks and alternative investments live. You won’t touch it for 10 years or more, giving it time to ride out market ups and downs. Alternative investments like real estate, commodities, or private credit can provide protection when traditional markets struggle. Think of it like buying some GooGoo Clusters on a trip to Nashville.
Don’t Diworsify – Be Ready to Weather the Markets
Are market swings and bear markets always a bad thing? Not necessarily. They’re part of the natural economic cycle and often pave the way for strong recoveries. But you have to be prepared. Your financial plan (easter basket) should be sturdy, responsive, and equipped for any challenge. Whether building your portfolio or filling your Easter basket, make every choice count.
As a family financial planner and occasional candy enthusiast, my door is always open if you have questions about your portfolio or asset allocation, diworsification, or just want to argue which is better, Reese’s Eggs or Cadbury.
