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Improper Asset Allocation and Failure to Diversify Claims

What is Asset Allocation?
Financial advisors have a duty to recommend suitable investment strategies, including a proper asset allocation.  Asset allocation refers to the mix or combination of assets classes in an investment portfolio.  Types of asset classes include: cash, bonds, stocks, real estate, foreign currency, and alternative investments.

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.  

Why are Asset Allocation and Diversification Important?
Asset allocation and diversification are important to the overall performance of a portfolio because different asset classes perform differently depending upon market conditions, at least in theory.  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.

What is a claim for improper asset allocation or lack of diversification?

There are many different ways in which an investment portfolio can be improperly allocated or diversified.  Improper asset allocation can occur when a financial advisor recommends an investment portfolio that is inconsistent with the stated goals, risk tolerance, and investment time horizon of the client.   It can also occur when an investment portfolio lacks proper diversification because the portfolio is invested in relatively few investments or one type of investment or investment sector (i.e. financial stocks). 

There is no one way or right way to allocate assets, but there are objectively wrong ways for your financial advisor to handle your investment portfolio.  As an extreme example, a retiree on a fixed income with an investment objective of income, should not be recommended an investment portfolio that is entirely comprised of speculative non-dividend yielding stocks.  Likewise, a 30 year-old investor seeking growth should not be recommended a portfolio of 100% cash. 

If your advisor or brokerage firm failed to adequately allocate your 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.

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