Diversification is an important aspect of a healthy investment portfolio. Having investments in a variety of different companies, industries, and types of investment can mitigate your financial risks by ensuring that localized problems with the market—whether it's a company having problems, or an entire industry—do not have a devastating effect on your investment portfolio. Additionally, having a diverse investment portfolio can maximize your potential for profit by spreading your investments out across a variety of different companies, market sectors, and asset classes.
If your portfolio is seriously overconcentrated, even normal and predictable market fluctuations can nearly wipe out your investments.
Types of Overconcentration
There are three general types of investment concentration:
- Overconcentration in a single company. If too much of your investment portfolio is invested in a single company, it may put you at significant risk for losses, as individual companies are particularly susceptible to unpredictable failures.
- Overconcentration in an industry. While the risk is not as great as overconcentration in a single company, overconcentrating investments within a specific industry or market sector can be devastating to an individual investor, as market fluctuations often affect entire industries.
- Overconcentration in a single asset class. A healthy investment portfolio should include a variety of types of investments, including different types of stocks, bonds, and other investments.
Maintaining a diverse investment portfolio can help ensure that not only do you limit the risk of losses, but you also maximize the potential for profits, as having a variety of investments increases possibilities of success as well.
What Constitutes Overconcentration?
As with many types of broker fraud, overconcentration can often be difficult to establish, and even more difficult to prove, in court or in arbitration. A diverse investment portfolio will help mitigate the risks of having your investments depend on the success of a single business or industry, while still allowing for healthy investment growth.
However, simply incurring losses to your portfolio is not always a sign of overconcentration or fraud in general. This is why it is essential that you review your portfolio in detail with someone who has experience in securities law, and who is able to recognize patterns and signs that point to broker malfeasance.
How to Get Help
If your investment losses are a result of your broker's overconcentration, contact an experienced securities attorney in your area immediately. He or she can review your portfolio in detail, and help you determine whether you have a sufficient case for investment fraud, and whether you may be eligible to recover compensation for the financial damages you've incurred.