What is excessive concentration?
Excessive concentration is the opposite of diversification. The benefits of diversification are well established. By diversifying between asset classes (e.g. stocks, bonds) and within asset classes, investors can reduce risk. By diversifying, investors can eliminate non-systematic risk, sometimes referred to as firm-specific risk, without decreasing the expected return on their portfolio. Through asset allocation, investors can increase and decrease systematic risk, or market risk, to match their risk tolerance.
How does excessive concentration affect my portfolio?
The benefits of diversifying are well established and FINRA Risk Explanation as follows:
Asset Allocation. By including different asset classes in your portfolio (for example stocks, bonds, real estate and cash), you increase the probability that some of your investments will provide satisfactory returns even if others are flat or losing value. Put another way, you’re reducing the risk of major losses that can result from over-emphasizing a single asset class, however resilient you might expect that class to be.
Diversification. When you diversify, you divide the money you’ve allocated to a particular asset class, such as stocks, among various categories of investments that belong to that asset class. Diversification, with its emphasis on variety, allows you to spread your assets around. In short, you don’t put all your investment eggs in one basket.
Is my broker or advisor liable if my account is over-concentrated?
If you have suffered damages due to excessive concentration of your portfolio, there is a good chance that you have a claim against your broker or advisor, either for recommending an unsuitable investment strategy or for breach of fiduciary duty.
Can I consult with an attorney about excessive concentration?
If your broker or advisor failed to properly diversify your portfolio (within or between asset classes), you may have a suitability claim and/or a breach of fiduciary duty claim against your broker/advisor. Mika Meyers regularly handles these types of claims on behalf of investors. For a free consultation, please contact Daniel J. Broxup at (616) 632 8059.