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Investment Type and Individual Security Overconcentration Claims

Duty to Recommend Diversified Investments/Investment Strategy
Financial advisors have a duty to their clients to recommend a diversified investment portfolio that is not saturated (also known as overconcentrated) with investments that are too closely correlated, either by asset class, type or sector.  An account or investment portfolio that is not diversified, but rather, invested in only a few highly correlated investments is said to be overconcentrated − leading to increased risk and potentially catastrophic losses.

Overconcentration can lead to increased risk because the risk associated with investing is concentrated in fewer assets.  For example, if a client's portfolio is comprised of 100 stocks in equal amounts and one of the companies goes bankrupt, then the client will only lose 1%.  However, if a client's entire portfolio is comprised of one company and that company goes bankrupt, then the client will lose 100% of their account.

When recommending a particular investment or investment strategy, financial advisors are also required to take into account the client's overall financial condition and other investments.  That means the financial advisor is required to inquire about and consider investments and property the client maintains outside of the account with the brokerage firm.     

If your advisor or brokerage firm overconcentrated your portfolio or overall assets, you may have a claim for negligence or misconduct in the event you suffered losses.  Please contact us today for a free, no-commitment consultation.


What is Diversification?

Financial advisors also have a duty to recommend a diversified investment portfolio.  Diversification is a concept related to asset allocation and is defined as reducing risk by investing in a variety of asset classes, different assets within the asset class, and investment sectors.  If, for example, an investment portfolio contained a single stock, then the investment portfolio would not be diversified.  


As an example, traditionally when stocks increase in value, bonds decrease in value. It is nearly impossible for even the most astute investment professionals to predict which assets classes will preform well in any particular year.  Thus, a proper asset allocation should take into account how different asset classes will perform relative to one another over time in order to reduce the overall risk in the investment portfolio and ensure a relatively stable rate of return.  


As a practical matter, proper asset allocation and diversification can help to ensure that an investor's life savings is protected from the risk of a company going out of business of a bond defaulting.

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