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Smart diversification is spreading your investing assets between bonds and stocks, economic sectors, geographical regions and size of company.

And then there's destructive diversification. That's a term that applies to the idea of spreading your personal investment accounts among multiple firms. A reader asked about this recently: "Do you recommend keeping investments at one institution or are we better off keeping our resources at more than one to spread our risk of losing access to our funds due to administrative error, technical glitches or outright fraud?"

One investment firm is ideal. Maybe two if you want to deal with an adviser and also have a do-it-yourself account. Beyond that, using multiple firms creates unnecessary complications in properly managing your portfolio. Maintaining your target mix of bonds and stocks, economic sectors, geographical regions and big and large companies is tough enough with one account. With several, you'll have to juggle multiple portfolios to preserve an aggregate mix that reflects your personal asset allocation plan. You may also miss out on discounted fees and commissions if you divide your assets. You'll certainly have more record-keeping and documentation to deal with if you keep multiple accounts.

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This reader's comment about administrative errors and technical glitches has some relevance. Online brokers occasionally have a bad streak where clients get spotty access to their accounts for a day or longer. Admin errors do happen as well. But there's a case to be made that spreading your accounts over, say, three firms just triples your chances of being exposed to wonky websites and other problems.

As for fraud, you guard against that by dealing with reputable firms that are members of self-regulatory groups like the Investment Industry Regulatory Organization of Canada (IIROC) and that participate in the Canadian Investor Protection Fund (CIPF) and Ombudsman for Banking Services and Investments (OBSI). Check individual advisers using an online database offered by the Canadian Securities Regulators.

When investors use multiple firms it suggests they haven't found one firm they can really trust. These firms are out there.

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