Overconcentration

Investors seeking to limit their exposure to the risks of the financial markets often turn to investment professionals, such as brokers and financial advisors, to manage their investment portfolios. These professionals are required to tailor investment strategies to match an individual’s financial goals, risk tolerance, and time horizon. 

However, unscrupulous or negligent brokers might jeopardize their clients’ financial well-being through overconcentration.

What is Overconcentration? 

Overconcentration occurs when a substantial portion of your investment portfolio is allocated to a single asset, sector, or type of investment. This can happen intentionally, due to a strong belief in a particular investment, or unintentionally, due to a lack of diversification. An investment professional may believe that investing heavily in a particular industry, such as the tech sector, will yield substantial returns and allocate a significant portion of the portfolio to tech stocks. Doing so, however, poses serious risks.

The Dangers of Overconcentration

• Increased Risk: Overconcentration magnifies the risk associated with a particular investment product, asset, or sector. If that area performs poorly, a substantial portion of your portfolio is at risk, potentially leading to significant losses.
• Lack of Diversification: Diversification is a fundamental principle of investment risk management. It involves spreading your investments across different asset classes to reduce exposure to any one investment’s volatility. Overconcentration disregards this principle, leaving you vulnerable to the performance of a single asset type.
• Reduced Liquidity: Investments that are overconcentrated can be challenging to sell quickly, especially if they are illiquid assets such as real estate or private equity. In emergencies or during changing market conditions, this lack of liquidity can be financially crippling.

What Can You Do if Your Broker Overconcentrated Your Investment Portfolio?

Investment professionals have a duty to provide their clients with a well-managed and balanced portfolio to avoid unnecessary losses. If a broker fails to diversify their client’s account, they may be liable for damages. If you lost money and suspect misconduct, consider seeking a third-party opinion, such as an attorney with expertise in securities law. They can review your investment history to identify overconcentration (or any other irregularities) and determine what recourse might be available to you.