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If you own a great stock or mutual fund, should you also buy the investment for your children? Or, if your parents tell you about a great performing investment that they own, should you go out and buy it for your own account? 

In both cases, the answer is probably “No.” While having a high-performing asset is definitely desirable, you can sometimes have too much of a good thing, especially within a single family. 

The general principle behind diversification is the minimization of potential loss. Since no single investment performs well under all economic conditions, a diversified portfolio decreases the chances of losing money when certain market sectors underperform.

Don’t put all of your eggs in one basket

The concept of diversifying assets, separating your investments into different types (stocks, bonds, mutual funds), different market sectors and industries (transportation, energy, technology, basic materials, utilities, etc.), different geographical locations, different size investments (large, medium, and small), is well known; but there is another important type of diversification: generational diversification. 

What’s good for the goose may not be good for the gander

If you are in line to receive an inheritance one day, you may want to think twice about owning the same assets as those in which the inheritance is invested. This is because if your parents are highly invested in one type of stock and that plummets, you stand to lose both your potential inheritance and your own assets at the same time. Ouch! 

Similarly, think twice before placing your assets and your children’s custodial account assets in the same investment vehicles. If you are planning on using their accounts to pay for their education and wedding expenses, and the invested assets drop in value, you lose on two fronts: their account is diminished and your own account has also dropped in value. 

Beyond traditional diversification models

A diversified portfolio should be the core of your investment strategy. Think beyond the typical diversification terms, and consider the ramifications of generational diversification in your portfolio.