- What Is Overconcentration?
- What Is Asset Allocation?
- What Is Diversification?
- How Do I Know if My Portfolio Is Overconcentrated?
- What Should I Do if My Portfolio Has Lost Value Due to Overconcentration?
Overconcentration occurs when your broker fails to properly diversify the investments and holdings in your portfolio. An investment portfolio can be Overconcentrated in either specific asset classes (i.e. equities, bonds, mutual funds, cash, etc.) or specific sectors (i.e., technology, health care, automotive, consumer goods, etc.).
Asset allocation is a fancy term for the overall makeup of your investment portfolio. The asset allocation of your portfolio should be based on your unique investment profile, which includes your time horizon, your risk tolerance, and your individual investment objectives. Asset allocation is a critical factor in ensuring that a portfolio is properly diversified.
Diversification is a risk-management strategy that involves adding different types of securities and investments to your portfolio to protect against the downside risk of any one specific asset class or sector. In theory, a diversified portfolio will experience higher long-term yields with less volatility compared to a portfolio concentrated in a particular asset class or sector.
Let’s say you open a brokerage account with XYZ Brokerage Firm and the first securities you purchase are ten (10) shares of Microsoft. After you buy the shares, your portfolio is 100% concentrated in Microsoft, meaning if the share price of Microsoft goes up 5%, then the value of your portfolio also goes up 5%. If the share price of Microsoft drops by 5%, so does your portfolio. Effectively, your portfolio is overconcentrated in both Microsoft and the technology sector.
There are several telltale signs that your portfolio is Overconcentrated in a particular security or sector. Do you only have a certain type of security in your portfolio? Do you only have shares of a certain company in your portfolio? Do you only have shares from a certain sector (like oil and gas, technology, or finance) in your portfolio? If your portfolio has lost value and you have answered “yes” to any of these questions, your losses may be a result of Overconcentration.
If you believe that your broker failed to properly diversify your portfolio or failed to warn you of the risks associated with an Overconcentration in your portfolio, you should contact an experienced Securities Law attorney, like the one’s at Malecki Law.