Overconcentration occurs when your broker fails to properly diversify your portfolio. Failing to diversify your investments can be within different asset classes (type of security, i.e., stock, bond, mutual funds, cash, etc.) or various sectors (health care, financials, automotive, pharmaceuticals, consumer goods, technology, international, etc.). Additionally, if there is "overconcentration" in any one of those specific areas, or even in a single stock, it might be the reason for your losses. If you notice all your investments declined at the same time, it may be a clue that your portfolio is overconcentrated. A New York investment overconcentration law firm like Malecki Law can assess the concentration in your portfolio at no cost.Asset Allocation, Concentration, and Diversification
Asset allocation is the makeup of your investment portfolio, involving different types of assets. Your asset allocation should be personalized, and dependent on various factors in your life. Three important factors your broker should consider are: your investment choices, your time horizon, and your risk tolerance.
- Types of investments include stocks, bonds, cash, real estate, and commodities. Each type of investment choice presents its own risks, which a broker should take into consideration for you and your financial goals.
- Time horizon is your expected number of months or years that you wish to invest. Your time horizon will impact the way your portfolio is set up. For example, an investor with a long-time horizon may be able to take on more risk than an investor with a short-time horizon.
- Risk tolerance is your willingness to take on risk and your ability to incur losses. Risk tolerance is generally measured on a spectrum. There are three main categories of risk tolerance on this spectrum: (1) conservative, (2) moderate, and (3) aggressive. Multiple factors can be considered when determining where you land on the risk tolerance spectrum, including your age, financial goals, and overall comfortability with taking on risk.
Overconcentration means that your account may have too much of one security or types of security (like oil and gas investments, technology investments or financial stock, for example.) This creates a concentration risk that your broker must explain to you so that you understand it and then you need to consent to such risk. If you notice your portfolio is overly concentrated in one security or sector, your portfolio is likely overconcentrated. Malecki Law’s experienced New York investment overconcentration attorneys can have a sector analysis done and assess whether negligence has occurred.
If the potential concentration risk was not discussed, that may be a sales practice violation that can form the basis of a case against the broker and the firm. Concentration risks should be avoided because overconcentration can multiply the losses incurred in an investor’s portfolio. There are other factors that can lead to concentration risks, including concentration in illiquid investments, like private placements and REITs. Illiquid means there is no market for the activity of trading in an investment, so it will be very difficult – if not impossible to get out of an illiquid investment if you need the money for any reason – such as health issues, a home purchase, etc.
Brokers should avoid potential concentration risks by appropriately diversifying their clients’ portfolios in different asset classes (such as stocks, bonds, cash, and mutual funds) and different sectors (such as Energy, Materials, Industrials, Utilities, Healthcare, Financials, Consumer Discretionary, Consumer Staples, Communication Service, Information Technology, and Real Estate.) If you notice signs of overconcentration or minimal diversification, you may have a case. An investment overconcentration lawyer in New York at Malecki Law can review your account concentration in a free consultation. Moreover, as the market fluctuates and asset sectors increase, changing the portfolio balance, a broker should rebalance portfolios routinely to keep an appropriate mix and allocation of investments.
Diversification means that your investment portfolio is evenly distributed amongst various assets. This is to avoid concentration risks by putting all your eggs in one basket. If your investments do not seem to be evenly distributed in different types of investments and in different types of companies within your portfolio, it may be a clue that your portfolio is overconcentrated. You need a New York investment law concentration firm like Malecki Law to review your potential case.