Are You Overprotecting Your Wealth? When Safety Becomes Too Costly

After working for decades and being disciplined about saving, your primary instinct may be to guard your growing wealth.

But you don’t want to take that impulse too far. Overprotecting wealth can lead to the loss of some of the wealth that you’re so eager to protect.

Understanding Wealth Protection

“At its core, wealth protection is about anticipating the biggest threats to your nest egg and addressing them in cost-effective ways,” said Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth.

For appropriate wealth protection, Boneparth recommends having the following:

• An emergency fund: Three to nine months of expenses in cash or cash-like securities so you’re not forced to sell in a down market
• Insurance based on your needs: This could be home and auto insurance as well as umbrella liability insurance if your net worth exceeds six figures
• Legal structures: Work with a lawyer to create wills, trusts, or LLCs for real estate and business assets
• A diversified portfolio: Think about diversifying across asset classes, sectors, and geographies.

“These strategies can feel especially appealing for those in or near retirement when the shift from earning income to relying solely on their nest egg… Even those far from retirement may find a wealth protection strategy alluring during times of market volatility,” said Carla Adams, a certified financial planner and founder of Ametrine Wealth.

Signs You Might Be Overprotecting Your Wealth

If more than 75% of your assets are in cash or bonds with short maturities, this may indicate that you’re overprotecting your wealth.

Other indicators include multiple overlapping insurance riders such as over-insuring jewelry that you rarely wear, and steering clear of growth-oriented assets, Boneparth explained.

Even young people in their 30s and 40s may find themselves overprotecting their wealth.

“Overprotecting is less of a concern for 30-somethings. But it still shows up in the form of sitting on too much cash, investing too conservatively, or carrying more insurance than necessary. Often this happens because they cross paths with an insurance salesperson eager to capitalize on their high-earning status, which is unfortunate, but true,” said Priya Malani, founder of Stash Wealth.

The Costs of Overprotection

Being too conservative with your investments can come at a cost, as you may be missing out on higher returns by not investing more of your money in high-growth assets like stocks.

And overprotection taken to the extreme can hamper your retirement savings. Beware of high fees on annuities, which can erode your returns, and allocating too much of your portfolio towards CDs, money market funds, and fixed income—which can offer paltry interest rates in low interest rate environments.

“Holding excessive amounts of cash and/or bonds may provide short-term peace of mind but in actuality can cause the portfolio to lose substantial value over time relative to inflation,” said Adams. “Annuities, which promise protection, come with high fees and limited upside potential, dampening portfolio growth.”

As Boneparth says, “every dollar parked in an ultra-safe vehicle is a dollar not compounding in equities or other growth assets, over decades that difference can amount to hundreds of thousands of dollars.”

Craft a Financial Strategy Based On Your Goals

Rather than keep your money mostly in cash and bonds, diversify your portfolio so that it has the best opportunity for growth. You’ll also want to periodically rebalance your portfolio to ensure that your investments still align with your financial goals.

“Building a diversified portfolio with the right mix of bonds as well as stocks is key so that the bonds provide stability and modest growth while stocks allow for meaningful portfolio growth over the long term,” Adams recommends. If you’re younger, you likely want to have a higher allocation of your portfolio in equities, yet as you age, you may shift your portfolio more towards fixed-income.

Additionally, try to only buy insurance policies that you need. For example, a whole life insurance policy may not be necessary if you have no dependents and are young and healthy. You want to avoid signing up for too many policies, as premiums can add up.

“We recommend carrying only essential insurance: health, disability, renters or homeowners, and auto,” Malani says. “You want to invest the rest in a diversified portfolio that aligns with your goals and timeline.”

The Bottom Line

Wanting to protect the wealth you’ve accumulated is a natural instinct. But you don’t want to overprotect it and miss the opportunity to grow it further.

You may be overprotecting your wealth if you have more than 75% of your money in cash or short-term bonds and unnecessary or overlapping insurance coverage.

If you think that’s you, try to strike a balance between capital preservation and growth by crafting a well-diversified investment portfolio. Additionally, avoid signing up for insurance policies that you don’t really need.