Why is Diversification Important?
We have all heard the phrase: “Don’t put all of your eggs in one basket.” The same is true with investments.
Financial advisors and investment advisors are trained throughout their career to diversify the accounts of their customers as a means to mitigate risk. To this end, brokerage firms encourage their financial advisors to construct portfolios that are diversified in many different types of investments, sectors of the market, asset classes, and geographic regions. Because the financial markets are cyclical, often times certain stocks, bonds, or investment products will appreciate in value while non-correlated securities will decline. A well-diversified portfolio may still decline in value. However, it will be less volatile than a concentrated portfolio.
How Do I Know if My Investments are Not Diversified?
You may be dealing with broker misconduct if your financial advisor has recommended that you:
- buy or hold a concentrated position in a single security,
- implement an investment strategy that lacks diversification across sectors of the market or asset classes, and
- you have experienced resulting losses.
It is always prudent investment advice to own a wide range of investments that are spread across:
- Different companies
- Different asset classes (i.e., stocks, bonds, mutual funds, real estate)
- Different sectors (i.e., financials, consumer cyclicals, commodities, real estate, healthcare)
- Different geographic reasons
If your portfolio is not adequately diversified, it is susceptible to volatility and sudden, precipitous drops in value.
Why do Brokers Fail to Diversify Their Clients’ Portfolios?
Failing to adequately diversify a client’s portfolio amounts to broker negligence. This might happen because the broker is:
- Overwhelmed with too many clients or accounts
- Self-dealing (e.g., has an undisclosed interest in the investment)
- Negligent in failing to consider your overall individual investor profile
- Simply isn’t paying close attention to your investments
- Lazy (i.e., has not performed due diligence)
In most instances, financial advisors become complacent and fail to make necessary portfolio changes in reaction to changing market conditions. These failures can lead to concentration in sectors of the market that are more prone to volatility and price movements and render your portfolio unsuitable.
Talk to an Attorney Who has Handled Hundreds of Claims Involving Suitability
If you believe your portfolio lacks sufficient diversification, and you have experienced investment losses, please contact the Wolper Law Firm for a free consultation and case evaluation to determine if this is the result of broker misconduct. If so, you may be able to recover all or part of your investment losses.