CIO Corner

The Election Changed Washington. It Didn't Change Your Plan.

Maybe you stayed up Tuesday night refreshing the results. Maybe you woke up Wednesday morning relieved. Or maybe you woke up worried about what the next two years will bring.

Either way, if you're an investor, there's a good chance another question followed close behind:

Should I be doing something with my money?

Will the results lead to higher stock prices? Could a shift in congressional control change the direction of tax policy, government spending, or economic growth? And should your investments look different now that the votes have been counted?

These are fair questions.

After all, elections have consequences. The people we send to Washington make decisions that influence the economy, businesses, and ultimately the financial well-being of American households.

But here's what tends to get lost in the post-election noise:

The political landscape changed this week. Your financial plan didn't, at least not yet.

And understanding the difference could save you from making an expensive mistake.

Elections Matter. Just Not the Way Most Investors Think.

Now, to be clear, I'm not suggesting that elections don't matter to financial markets.

Quite the opposite.

During my years developing macroeconomic research and investment strategy at Wells Fargo Investment Institute, evaluating government policy and geopolitical developments was an important part of understanding the economic outlook.

That's because decisions made in Washington can have real consequences for corporate earnings, inflation, interest rates, and ultimately asset prices.

Consider fiscal policy, for example.

Changes to government spending and taxation can influence consumer demand and business investment. Tax reductions may encourage additional spending and investment, but depending on how they're financed, they can also contribute to larger federal deficits.

And those deficits matter because increased government borrowing can influence Treasury yields, which in turn affect mortgage rates, corporate borrowing costs, and the valuation of financial assets.

Trade policy is another example.

Tariffs might provide an advantage to certain domestic producers, but they can also raise input costs for companies relying on imported goods. Depending on how businesses respond, those higher costs can squeeze profits or contribute to higher consumer prices.

So, from this perspective, the composition of Congress matters because it can influence which policies advance, which face resistance, and which remain unresolved.

But here's where things get interesting.

The economic consequences of political decisions aren't always the same as their intended outcomes.

A policy designed to stimulate growth could contribute to inflation. A policy intended to protect domestic industries could create new costs elsewhere in the economy.

And even when investors correctly anticipate a policy change, financial markets may have already reflected those expectations in asset prices.

That's why understanding the election results is only the beginning of the investment analysis.

The more important question is how actual changes in policy interact with the economic environment that already exists.

Midterm Years Look Weak for Stocks. The Elections Weren't the Reason.

Now, if we turn to history, there's good reason to be cautious about drawing investment conclusions from election outcomes alone.

According to research from J.P. Morgan Asset Management, the S&P 500 has generated an average annual total return of 9.2% during midterm election years since 1937, compared with 13.3% during non-midterm years.

At first glance, that might suggest that midterm elections are bad for stocks.

But the numbers don't tell the whole story.

Consider 2018 and 2022.

Both were midterm election years, and both experienced significant stock market declines.

But the primary pressures on markets weren't the elections themselves.

In 2018, investors were dealing with tighter monetary policy, rising interest rates, and concerns about slowing global growth.

In 2022, inflation was running at its highest levels in decades, and the Federal Reserve was aggressively raising interest rates to contain it.

The elections happened against those economic backdrops. They weren't necessarily the reason markets struggled.

And that's an important distinction because correlation doesn't establish causation.

Indeed, research from J.P. Morgan also shows that the S&P 500 has historically generated positive returns in the twelve months following every midterm election since 1950, with an average gain of approximately 15%.

That's an interesting observation, but it isn't a forecast for the coming year.

Those historical returns occurred under very different economic conditions, interest-rate environments, and market valuations.

The takeaway isn't that stocks are destined to rally after an election.

It's that trying to use election outcomes alone to predict future market performance is a much less reliable exercise than many investors might believe.

The Bigger Risk Isn't Washington. It's How We React to It.

There's another factor that makes investing around elections particularly challenging.

And it has less to do with Washington than with how we process political information.

You see, whether we realize it or not, our political beliefs can influence our expectations about the economy.

When the political party we support wins, we might become more optimistic about the future.

When the other party wins, we might become more pessimistic.

But that change in sentiment doesn't necessarily reflect a change in the underlying economy.

Consider research published in The Journal of Finance examining how millions of American households adjusted their investments around the 2016 presidential election.

The researchers found that investors identified as likely Republicans increased their stock exposure following Donald Trump's victory, while investors identified as likely Democrats shifted toward safer assets.

Importantly, these changes were largely driven by a relatively small group of investors making substantial portfolio adjustments.

Think about that for a moment.

Two investors could look at the same election result, face the same economic conditions, and make completely different investment decisions simply because of how they interpret the political news.

Yet neither investor's retirement spending needs, long-term goals, or financial obligations necessarily changed overnight.

That's why I've long maintained that political opinions and investment decisions should be kept separate.

It's certainly reasonable to have concerns about government spending, deficits, taxes, or the direction of economic policy.

And it's equally reasonable to feel optimistic about policies that you believe could support economic growth.

But neither optimism nor pessimism is a substitute for evaluating corporate profits, interest rates, valuations, and the risks embedded in your investment portfolio.

Being right about an election doesn't automatically mean you'll be right about the stock market.

We Plan Around Policy Changes, Not Election Results

So, what does all of this mean for someone preparing for retirement or already living off their investments?

Well, this is where the distinction between monitoring economic developments and reacting to political headlines becomes particularly important.

At Franklin Madison Private Wealth, we approach economic and political uncertainty within the context of each client's broader financial plan.

And that means looking beyond what might happen in Washington to understand how different economic outcomes could affect a client's ability to meet their financial obligations.

Consider a couple approaching retirement that we recently worked with.

One of the central questions in their planning process was how to transition from earning a paycheck to generating income from their investments.

To answer that question, we first examined their actual household spending, separating recurring expenses from discretionary purchases and larger one-time financial commitments.

We then evaluated how their financial situation would change as employment income ended, healthcare costs shifted, and Social Security benefits eventually began.

An important part of that process involved modeling a multiyear Roth conversion strategy to evaluate whether paying taxes on retirement savings earlier could reduce their overall tax burden later in life.

Now, consider how this year's election fits into that picture.

Congressional decisions could eventually affect income tax provisions, healthcare policy, or other factors incorporated into their retirement projections.

But we wouldn't automatically change the couple's investment portfolio based solely on a change in congressional control.

Instead, we'd want to understand whether an actual policy change materially alters the assumptions supporting their plan.

For example, if tax legislation changes the economics of their Roth conversion strategy, we can revisit the timing and amount of future conversions.

If changes to healthcare policy affect their anticipated insurance costs, we can incorporate those costs into their retirement cash-flow projections.

And if changing economic conditions lead to higher inflation or weaker investment returns, we can evaluate how those developments affect the sustainability of their withdrawal strategy.

The key is that we're responding to changes in the client's financial circumstances and planning assumptions, not simply to changes in the political landscape.

You Don't Have to Predict the Next Crisis to Be Ready for It

The same approach applies to how we manage investment risk.

In another retirement planning engagement, our focus was on helping a client establish a more disciplined system for funding ongoing living expenses.

A key consideration was ensuring that the client had an appropriate amount of cash available to meet near-term spending needs without becoming overly dependent on selling investments at unfavorable times.

To accomplish this, we established a cash management framework that coordinated required minimum distributions, portfolio income, and planned withdrawals.

We also developed guidelines for maintaining and replenishing cash reserves, including circumstances in which it might be appropriate to delay selling equities during periods of significant market volatility.

Why does that matter?

Because for a retiree drawing income from a portfolio, the timing of investment losses can have lasting consequences.

A prolonged market decline combined with ongoing withdrawals can reduce the amount of capital available to participate in a subsequent recovery.

This is commonly referred to as sequence-of-returns risk.

Now, having cash available doesn't eliminate investment risk, and there's a cost associated with holding assets that may earn less than stocks over time.

But appropriately sized reserves can provide flexibility in meeting spending needs during market downturns.

And that flexibility is useful whether the next period of volatility comes from political uncertainty, inflation, a recession, or an unexpected geopolitical event.

In other words, we don't need to know which event will cause the next market decline to prepare for the possibility that one will occur.

That's the difference between trying to predict uncertainty and building a financial plan designed to accommodate it.

Ask What Changed for You, Not What Changed in Washington

Now that the election is behind us, the financial news cycle will inevitably shift toward what the new congressional landscape could mean for economic policy.

And there will be no shortage of opinions about which industries might benefit, whether inflation will move higher or lower, and what all of this could mean for stock prices.

Some of those arguments may prove correct.

But before making changes to your investments, I'd encourage you to ask yourself a more practical question:

What has actually changed about my financial situation that warrants a change in my investment strategy?

For instance, has your ability to withstand a market decline changed? Have your cash-flow needs increased? Are you approaching retirement with a portfolio that's more concentrated or aggressive than you originally intended?

And what about your tax situation?

If you're approaching retirement with substantial savings in a traditional IRA or 401(k), have you considered how future required minimum distributions, Social Security benefits, and potentially higher tax rates could affect your retirement income?

These are the types of decisions worth revisiting regularly.

Not because one political party won or lost an election, but because the economic assumptions underlying your financial plan can change over time.

And sometimes, an adjustment will be warranted.

That could mean rebalancing a portfolio that has drifted away from its intended allocation, reevaluating the amount of cash you hold, or updating a multiyear tax strategy following a meaningful change in tax law.

Other times, after reviewing the available information, the appropriate course of action might be to make no changes at all.

That's not ignoring uncertainty. It's managing it deliberately.

The Election Is Over. Your Financial Plan Still Has Work to Do.

As we move beyond the 2026 midterms, there's little doubt that Washington will remain an important source of economic headlines.

Questions surrounding fiscal policy, government debt, taxation, and regulation aren't going away simply because the election has concluded.

And as new policies are debated and implemented, we'll continue evaluating their potential consequences for financial markets and the economy.

But for individual investors, the bigger takeaway is that your investment strategy shouldn't depend on getting the political forecast right.

It should depend on having a clear understanding of what you're trying to accomplish, the risks you're willing and able to take, and the financial resources you'll need along the way.

After all, the next congressional election is only two years away.

Your retirement could last another twenty or thirty.

That's a much longer time horizon, and it's the one your financial plan needs to be built around.

At Franklin Madison Private Wealth, we help individuals and families coordinate their investment, tax, and retirement income strategies so that financial decisions remain grounded in long-term priorities rather than short-term uncertainty.

If you're concerned about how changing economic conditions could affect your retirement, we invite you to schedule a conversation to explore how your financial plan is positioned for the years ahead.

https://franklinmadisonadvisors.com/schedule-now/

Related Reading

Elections: Why You Shouldn't Mix Politics and Your Portfolio

Here's the Cost of Moving to the Sidelines

What Benjamin Graham Can Teach Us About Investing When the World Is Falling Apart

Keep Calm and Trust Your Investment Plan

July Market Update: A Loud Month, a Quiet Market

Research and Supporting Sources

J.P. Morgan Asset Management, "2026 Midterm Election Hub."
https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-themes/us-elections/

J.P. Morgan Asset Management, "How Do Markets Perform Post-Midterms?"
https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/market-updates/on-the-minds-of-investors/how-do-markets-perform-post-midterms/

Meeuwis, Parker, Schoar, and Simester (2022), "Belief Disagreement and Portfolio Choice," The Journal of Finance.
https://doi.org/10.1111/jofi.13179

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by Peter Donisanu, ChFC®, AIF®

The Return You're Chasing Already Happened

There's a particular kind of investment decision that rarely feels reckless in the moment.

A part of the market has had an exceptional run. The companies are strong. The narrative makes sense. Every time you open your account, those positions seem to be doing exactly what you hoped they would.

So you add more.

That doesn't necessarily feel like chasing returns. It can feel prudent. Why put new money into investments that have lagged when the winners seem to be proving themselves month after month?

The problem is that your brain may be answering a different question than the one your portfolio needs you to answer.

Instead of asking, What mix of investments gives me the appropriate amount of risk for where I'm trying to go? you begin asking, What's been working lately?

That's where recency bias can quietly take control of a portfolio.

And for successful investors, particularly technology executives whose careers, compensation, and accumulated wealth may already be connected to the same companies or sector, the bigger risk isn't simply choosing the wrong investment next.

It's allowing yesterday's returns to determine how much risk you take tomorrow.

What Just Happened Feels Like What Happens Next

One of the central problems in investing is that our expectations aren't formed in a vacuum.

What we've recently experienced matters.

Robin Greenwood and Andrei Shleifer examined six different measures of investor expectations covering nearly five decades. They found that expectations for future stock returns were strongly tied to past market returns and to how high the market had already climbed.

In plain English, after stocks performed well, investors tended to expect more of the same.

But there was another important finding: those expectations were strongly negatively related to the returns the models actually projected going forward. The periods that left investors feeling more and more optimistic weren't necessarily the periods when future returns looked attractive.

A strong return is evidence of what's happened.

It's not evidence of what must happen next.

Research by Ulrike Malmendier and Stefan Nagel adds another piece of the puzzle. Studying household investing with Survey of Consumer Finances data from 1960 through 2007, they found that people's own experiences with stock and bond returns shaped how much risk they were willing to take and how they allocated their portfolios. More recent experiences carried greater weight.

Our memories, in other words, can become inputs into our portfolios.

And the freshest memories can become some of the most influential.

The Return That Convinced You Is the Return You Already Missed

This tendency shows up in what investors actually do with their money.

Erik Sirri and Peter Tufano studied money flowing into and out of equity mutual funds and found that investors based their buying decisions heavily on past performance. The relationship was particularly strong among the best-performing funds: exceptional prior performance pulled in a disproportionate share of new money.

That makes intuitive sense.

The investment with the best story is often the investment whose performance has already supplied the evidence for that story.

None of this means that last year's winner must become next year's loser.

A technology company can have an extraordinary year and keep performing well. An expensive asset can become more expensive. Market leadership can last much longer than investors expect.

That's why the lesson isn't to bet against whatever has recently performed well.

The lesson is simpler:

The return that convinced you to buy is a return that's already occurred.

Your decision today needs to be justified by what the investment contributes to your portfolio from this point forward.

How Concentration Actually Shows Up

This issue is usually more subtle in practice than an investor deliberately deciding to make a giant bet on last year's winner.

In one recent planning engagement, we worked with an executive whose compensation included salary, bonus, and recurring restricted stock units.

Those RSUs were an important part of the family's wealth-building engine. At the same time, the taxable portfolio was being built to serve an entirely different purpose: helping create enough financial flexibility for the executive to eventually step away from a high-paying career and move toward work optionality.

That distinction mattered.

Each time another block of RSUs vested, there were effectively two choices.

The first was passive: simply allow the employer shares to accumulate.

The second was deliberate: treat the vest as a new capital-allocation decision and ask where those dollars belonged given the family's overall portfolio, future spending needs, and risk capacity.

We chose the second approach.

The planning process called for vested equity to help fund a diversified taxable portfolio rather than allowing employer stock exposure to compound indefinitely by default. That taxable portfolio was spread across multiple asset classes and placed on a quarterly rebalancing schedule.

The important part wasn't predicting whether the employer's stock would outperform.

We didn't need to.

The issue was that the client's salary, future compensation, and a growing portion of financial wealth could otherwise become increasingly dependent on the same company.

And a position can become concentrated without the investor ever consciously deciding, I want more concentration.

Imagine that a $500,000 employer-stock position rises to $750,000.

Nothing was purchased.

No investment decision was made.

But the risk exposure changed materially.

Then another RSU grant vests.

Keeping those shares may feel innocuous because the stock has performed well, and because familiarity with the company can make the investment feel easier to understand than something outside the investor's immediate experience.

Another vest arrives six months later.

Then another.

Over time, what began as compensation can quietly become an investment thesis.

That's the practical danger of recency bias for investors with equity compensation. The bias doesn't always tell you to go out and buy the hottest stock.

Sometimes it simply tells you there's no reason to disturb what's already been working.

Success Can Change the Portfolio Without Your Permission

Now extend that problem across the rest of a high-income household's balance sheet.

The executive owns employer shares.

The 401(k) contains a large-cap U.S. index.

The taxable account owns another broad-market strategy.

Perhaps there are additional technology holdings accumulated over the years.

Viewed separately, none of those investments may appear particularly alarming.

Viewed together, however, they may represent substantially more exposure to the same companies, sector, and economic forces than the investor realizes.

This is particularly important for technology professionals.

Your human capital may already depend on the technology industry.

Your bonus may depend on company performance.

Your future RSU value depends on the employer's stock.

Your existing shares may represent a substantial portion of your financial capital.

And broad-market indexes can add further exposure to some of the same companies that have already driven your wealth higher.

The question, then, isn't simply, Is this a good company?

It may be an exceptional company.

The better portfolio question is:

How much of my financial future should depend on it?

Lisa Meulbroek's research into company stock held by employees illustrates the economic problem created by combining employment exposure with concentrated ownership of employer shares. Even when an employee believes strongly in the company, concentrated employer stock exposes the household to risks that could otherwise be diversified.

That distinction matters because diversification isn't a judgment about whether your company will succeed.

It's a judgment about how much of your family's future should depend on being right about any single outcome.

Why Portfolio Discipline Sometimes Feels Wrong

This is where a disciplined investment process earns its keep.

You establish what role each asset is supposed to play.

You decide how much concentration you're willing to accept.

You determine an appropriate allocation based on the return you need, the risk you can afford to take, your liquidity requirements, taxes, time horizon, and the goals the portfolio ultimately needs to fund.

Then you periodically compare the portfolio you actually own with the portfolio you intended to own.

That last step matters because successful investments don't remain politely inside their original allocations.

They grow.

For an investor receiving equity compensation, there's another layer: new shares may keep arriving even after an existing position has already become large.

That means maintaining the portfolio may require an active process for deciding what happens when shares vest.

Hold?

Sell?

Diversify?

Fund another goal?

The answer will vary by investor. Taxes, trading restrictions, holding periods, liquidity needs, charitable objectives, and the rest of the financial plan all matter.

What shouldn't determine the answer by itself is the fact that the stock has recently gone up.

Sometimes the most important portfolio decision isn't identifying the next winner.

It's recognizing how much your previous winners have already changed your risk exposure.

Don't Ask Your Memory to Vote

The solution to recency bias isn't becoming better at predicting which sector will lead next.

It isn't selling everything that's performed well.

And it certainly isn't reflexively buying whatever performed poorly.

Those approaches simply replace one forecast with another.

The better defense is an investment process that doesn't require you to reconstruct your portfolio strategy every time the market hands you a new reason to feel optimistic or pessimistic.

Build the portfolio around your objectives and risk profile.

Understand your exposure across all of your accounts.

Include employer stock and future equity compensation when evaluating concentration.

Establish parameters for how much risk you're willing to allow any one company, sector, or economic driver to contribute.

And when equity compensation vests, treat those shares as a fresh allocation decision rather than automatically assuming yesterday's allocation should become tomorrow's.

Then periodically compare the portfolio you actually own with the one you deliberately set out to build.

That leads to one useful question to ask this quarter:

Have my recent winners quietly made me more concentrated than I ever consciously chose to be?

If the answer is yes, that doesn't automatically mean those investments should be sold.

Taxes matter. Equity-compensation restrictions matter. Liquidity needs matter. Your broader financial plan matters.

But it does mean the portfolio deserves another look.

Because the job of an investment strategy isn't to own whatever just worked.

It's to maintain the amount and type of risk necessary to get you where you're trying to go, even when the rearview mirror is telling you to do something else.

Sources

Greenwood, Robin, and Andrei Shleifer. "Expectations of Returns and Expected Returns." The Review of Financial Studies, 2014.
https://academic.oup.com/rfs/article-abstract/27/3/714/1580705

Malmendier, Ulrike, and Stefan Nagel. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?" The Quarterly Journal of Economics, 2011.
https://academic.oup.com/qje/article-abstract/126/1/373/1901343

Sirri, Erik R., and Peter Tufano. "Costly Search and Mutual Fund Flows." The Journal of Finance, 1998.
https://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00066

Meulbroek, Lisa. "Company Stock in Pension Plans: How Costly Is It?" The Journal of Law and Economics, 2005.
https://www.journals.uchicago.edu/doi/abs/10.1086/430807

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by Peter Donisanu, ChFC®, AIF®

Why Diversification Feels Broken Right Before It Works

Diversification can feel like a mistake when one part of the market is doing all the work.

That's the part investors don’t always appreciate.

Diversification is easy to believe in when everything's working. It's much harder to believe in when a narrow group of stocks is carrying the market higher and the rest of your portfolio feels like dead weight.

That's when the questions start.

Why own bonds?

Why own value stocks?

Why own international stocks?

Why own anything other than the part of the market that's clearly winning?

Those are fair questions. They're also the exact questions that tend to show up right before diversification matters most.

In our portfolio work, we don’t treat diversification as a prediction tool. It's a risk-management discipline. It's not there because we know exactly which part of the market will lead next. It's there because we don’t.

Diversification Isn’t Supposed to Feel Good All the Time

The purpose of diversification isn’t to beat the hottest asset class every year.

It's not designed to make every part of your portfolio look smart at the same time. It's not designed to keep up perfectly with whatever corner of the market is leading today. And it's not designed to eliminate frustration.

In fact, a diversified portfolio almost always owns something that feels disappointing.

That's not a flaw. That's the tradeoff.

If every part of your portfolio is working at the same time, there's a good chance your portfolio isn’t as diversified as you think. You may simply own different versions of the same risk.

True diversification means owning investments that behave differently under different conditions.

Some may lead when growth stocks are in favor.

Some may help when interest rates fall.

Some may provide stability when stocks are under pressure.

Some may become useful when market leadership broadens beyond the same small group of winners.

But because those investments behave differently, they won’t all work at once.

That's what makes diversification frustrating.

It's also what makes it valuable.

Diversification doesn’t guarantee a profit or protect against loss. No portfolio strategy can do that. But it can reduce the risk that one market segment, one economic outcome, or one investment theme determines the entire result of your plan.

That distinction matters.

The Problem Starts With Comparison

The hardest part of diversification isn’t the math.

It's the comparison.

When large-cap growth stocks lead for a long stretch of time, a balanced portfolio can feel too cautious. When a handful of companies are responsible for most of the market’s gains, anything outside of those companies can feel unnecessary. When the index keeps moving higher and your portfolio is moving more slowly, discipline starts to feel like a drag.

That's usually when investors begin to second-guess the plan.

At first, it's just an observation.

Then it becomes a question.

Then it becomes frustration.

And eventually, it can become action.

That's where investors get into trouble.

Because the decision to abandon diversification rarely feels reckless in the moment. It often feels rational. It feels like responding to the evidence. It feels like finally admitting what's been obvious for a while.

Why own the laggards when the winners are right there?

But that line of thinking can quietly turn a long-term investment plan into a performance chase.

And performance chasing has a way of showing up late.

Market Leadership Doesn’t Last Forever

The problem with chasing what's working now is that market leadership changes.

It doesn’t always change quickly. It doesn’t always change when valuations suggest it should. And it doesn’t always change in a way that feels obvious ahead of time.

But it changes.

That's why diversification exists in the first place.

It's not an admission that returns don’t matter. It's an acknowledgment that the future is uncertain.

Think about a period when large-cap growth stocks have led the market for several years. In that environment, a portfolio that also owns value stocks, small caps, international equities, or high-quality bonds may lag the most visible market benchmark.

The investor may look at the portfolio and feel like too many pieces aren’t pulling their weight.

Then conditions shift.

Interest rates move.

Earnings leadership broadens.

Valuations begin to matter again.

The economy slows, reaccelerates, or changes in a way investors didn’t expect.

Suddenly, the parts of the portfolio that looked unnecessary may become the source of stability, income, or return.

That doesn’t mean every diversifying asset will work perfectly. It doesn’t mean a diversified portfolio will avoid losses. And it doesn’t mean diversification will protect against every bad outcome.

But it does mean the portfolio isn’t dependent on one narrow market outcome continuing forever.

That's the point.

A concentrated portfolio feels best when the concentrated bet is working.

A diversified portfolio can feel less exciting during narrow leadership.

But when leadership changes, the difference matters.

Concentration Risk Often Feels Best Right Before It Matters

One of the reasons diversification is so difficult is that concentration risk can feel rewarding for a long time.

That's what makes it dangerous.

When one asset class, sector, or stock keeps leading, concentration doesn’t feel like risk. It feels like confirmation. The investor feels rewarded for having more exposure to the winners and less exposure to everything else.

This can be especially challenging for investors with concentrated company stock, equity compensation, or large positions that have appreciated over many years. The position may have created meaningful wealth. It may still be a high-quality company. It may still have a strong long-term story.

I worked with a client recently who was heading into retirement with a large share of their net worth sitting in company stock. They'd watched that stock grow across their entire career. Selling any of it felt like betting against their own success story.

I told them about a group of people I met years ago when I worked in Saint Louis. Most were former employees of Wachovia, and many were approaching retirement in 2008. Like my client, a large portion of their retirement savings sat in company stock. When the financial crisis hit and Wachovia collapsed, their savings went with it. Years of disciplined saving disappeared in a matter of months, not because they'd done anything wrong, but because their financial future depended entirely on one company continuing to succeed.

That story isn’t meant to scare anyone away from company stock. It's meant to separate two different questions. The first is, “Has this position performed well?” The second is, “What happens to my retirement plan if it stops?” My client’s stock may still have a bright future. But their retirement plan shouldn’t require it to.

For a deeper look at how to evaluate whether you’re sitting on a concentrated position and what to do about it, see Don’t Keep All Your Eggs in One Basket.

But none of that eliminates concentration risk.

A great company can still become an oversized position.

A strong sector can still become overowned.

A successful investment can still become too important to the family’s financial future.

That's why diversification isn’t just an investment concept. It's a planning concept.

The question isn’t simply, “What has performed best?”

The better question is, “How much of my financial life depends on this one thing continuing to work?”

That's a different question.

And for high-net-worth families, retirees, and investors with concentrated wealth, it's often the more important one.

The Risk Isn’t Just Losing Money

The risk isn’t simply that the market pulls back.

The bigger risk is that investors make a permanent decision based on a temporary environment.

That matters because most families aren’t investing for entertainment, ego, or quarterly bragging rights.

They're investing to support a retirement income plan.

To fund education.

To manage concentrated stock exposure.

To preserve liquidity.

To reduce the risk of being forced to sell at the wrong time.

To keep their broader financial life moving in the right direction.

For those investors, the portfolio has a job.

Its job isn’t to win every short-term comparison.

Its job is to support the plan.

That means some parts of the portfolio may look unnecessary for a while. Some may lag. Some may feel boring. Some may be hard to appreciate when the market’s favorite trade is working.

But every allocation should have a purpose.

Growth assets are there for long-term appreciation.

Defensive assets are there for stability and liquidity.

Income-producing assets are there to support cash flow.

Diversifying assets are there because the future doesn’t always look like the recent past.

The question isn’t whether every piece is outperforming today.

The question is whether the total portfolio is built to survive different market environments.

Diversification Has to Be Judged Against the Plan

A diversified portfolio shouldn’t be judged only against the market’s current favorite.

It should be judged against the plan it was built to support.

That includes the investor’s time horizon, spending needs, withdrawal strategy, tax situation, liquidity needs, risk tolerance, and ability to stay invested when markets become uncomfortable.

For an accumulator, diversification may be about avoiding overdependence on one source of return.

For a retiree, it may be about managing sequence-of-return risk and maintaining enough stability to support withdrawals during difficult markets.

For an executive with equity compensation, it may be about reducing the risk that career income, company stock, and long-term wealth are all tied to the same business outcome.

For a family stewarding generational wealth, it may be about preserving flexibility across market cycles rather than maximizing exposure to the latest winner.

The right portfolio isn’t the one that looks best in hindsight.

It's the one the investor can actually live with, fund goals from, and stick with when the environment changes.

That's where diversification earns its place.

Not because it always feels good.

Because it helps keep the plan from depending on one version of the future.

Don’t Confuse Frustration With Failure

There will always be moments when diversification feels broken.

There will always be a stock, sector, asset class, or theme that makes the disciplined portfolio look dull by comparison.

And there will always be investors who are tempted to simplify the portfolio around whatever's worked best recently.

But temporary frustration isn’t the same thing as strategic failure.

Sometimes diversification feels broken because one part of the market has dominated for a long period of time.

Sometimes it feels broken because the benefit hasn’t been needed yet.

Sometimes it feels broken because the thing it's designed to protect against hasn’t happened.

That doesn’t make it useless.

It makes it easy to underappreciate.

The real test of diversification doesn’t come when the market’s current favorite is still leading. It comes when leadership changes, when expectations shift, when volatility returns, or when investors are reminded that no single trade works forever.

By then, it may be too late to rebuild the portfolio without paying a price.

So don’t judge diversification by whether it keeps up with the market’s current favorite.

Judge it by whether your portfolio can survive a change in leadership.

Because by the time diversification feels obvious again, the opportunity to stay disciplined may have already passed.

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by Peter Donisanu, ChFC®, AIF®