Over – Concentration
A fundamental principle of investment is diversification. Proper diversification is one of the best ways to control risk and avoid excessive losses. A sufficiently diverse investment portfolio can control risk and protect investors from sustaining excessive losses as a result of common market fluctuations while still allowing for healthy profits from gains in discrete stocks and in market sectors, as well as in different asset classes, or types of investments.
A properly diversified portfolio should include investments in different companies, different market sectors, and different types of investments. Common types of over concentration include:
- Investing too large a percentage of your portfolio in a single company, leaving the investor open to sustaining serious loss if that company encounters problems – even problems that were largely unpredictable.
- Investing too much in a single market sector, leaving the investor at risk of suffering disproportionately with normal market fluctuations. An example of over-concentration occurred when the dot-com bubble burst; investors who were overly invested in dot-com companies incurred devastating losses from such investments.
- Investing in only one type of security, or asset class, such as only common stocks (including mutual funds that invest in common stocks) rather than a mix of common stocks, preferred stocks, and debt instruments (bonds). For the best risk management, your stock portfolio should include a mix of types of investments, including common stocks, preferred stocks, and bonds.
Like many types of stock fraud, however, over concentration can be difficult to identify and difficult to prove. Depending on the client’s investment objectives or specific instructions, over concentration may be acceptable, especially for risk-tolerant investors and those with experience and advanced understanding of the stock market. For many investors, however, the risk of over concentration is too great, and the losses that can occur as a result can be devastating.
If you believe your broker, adviser, or investment professional has failed to diversify your portfolio against your instructions or investment profile, contact Stephanie M. Beige at email@example.com to discuss your rights.