If you haven’t yet experienced a significant loss—but you’re concerned that your broker or investor might not be acting in your best interest with your portfolio—talk to someone as soon as possible.
You trust your investment broker or adviser to handle your portfolio in a way that best protects your economic future and helps you reach your financial goals. Legally and ethically, advisors should make investment decisions based on factors such as your age and your level of risk tolerance. Unfortunately, some brokers put their own financial interests above that of their clients, unreasonably exposing them to a high risk of catastrophic losses.
If your stockbroker or financial advisor concentrates a large portion of your investments in one area—known as a lack of diversification—it can expose you to significant financial risk.
If you suffer substantial financial losses due to the negligent or careless acts of a financial advisor or brokerage firm, you could have the basis for a legal claim. If you are worried that you might suffer financial losses due to a lack of diversification, consider talking to a lawyer now, before the damage is done.
What is Lack of Diversification?
To understand a lack of diversification, it helps to identify first what diversification means in financial investments. Investopedia defines diversification as a portfolio management strategy that mixes investment vehicles and asset types.
Funds can be placed in a variety of different classes of assets or investment vehicles, such as stocks, bonds, funds, real property, commodities, cash and cash-equivalents, etc. If an investment advisor places all a client’s funds in real estate, rather than spreading the funds across other available vehicles, this is an example of lack of diversification.
Your portfolio might also lack diversification if your funds are all invested in a particular industry or sector. For example, anyone who was overly invested in the cruise line industry prior to the COVID-19 pandemic likely suffered significant losses. Placing a large concentration of funds in a single entity can also qualify under this definition, as can the overconcentration of assets in one geographic region.
Although less common, economic experts have identified other forms of lack of diversification, such as some employee stock ownership programs (ESOP).
What Risks Does Lack of Diversification Cause?
The goal of diversifying investments is to spread risk across a given portfolio, so as to limit the damage that can occur should one aspect of the market falter. Very rarely do all asset categories move at the same time. In fact, the conditions that cause one category to falter typically cause other categories to do better.
Historically, specific market categories or segments suffer losses due to a variety of reasons. A natural disaster that strikes a given geographic region can result in investment losses tied to that area. If volatility strikes the U.S. stock market, Asian or European markets might be less affected. When the housing crisis struck in 2008, many investors took heavy losses because they had concentrated their investments heavily in residential real estate development.
Some risks cannot be eliminated through investment diversity, such as interest rate fluctuation, inflation, political instability, and—as we saw in 2020—global pandemic. Further, even careful consideration of a specific investment cannot prevent something from going wrong. However, stockbrokers and financial advisors have an obligation to take whatever measures they can to mitigate their clients’ risk.
Are You at Risk for Financial Losses?
Some investors choose to concentrate their assets in a specific sector or investment profile with the hope of significant gains. This elevated level of risk—and its potential for an elevated level of reward—should only be undertaken by highly experienced investors with a high tolerance for risk. Even then, you can take steps to help offset risk.
However, under most circumstances, no broker or investment advisor should expose a client to risk with an undiversified investment portfolio. In fact, your broker should ensure diversity both within asset categories and between asset categories.
What counts as diversification for you and your portfolio is unique and deserves specific attention. No formulaic approach can ever be effective. Your advisor should take the time to understand you, your goals, and your level of sophistication as an investor. Factors such as your age, your employment status, your financial and estate plan status, etc., are also important when determining the right mix of investments.
Unfortunately, no matter how careful you are, you could still fall victim to a negligent or unscrupulous stockbroker or investment advisor.
When Should You Call an Investment Loss Attorney?
If you have suffered a financial loss that you believe resulted from an investment lack of diversification in your portfolio, you owe it to yourself to contact an attorney. An experienced investment losses lawyer can guide you through the process of pursuing a reimbursement claim, potentially recovering some or all of your damages.
If you haven’t yet experienced a significant loss—but you’re concerned that your broker or investor might not be acting in your best interest with your portfolio—talk to someone as soon as possible. You could save yourself immeasurable financial losses and emotional trauma.