What is Overconcentration?
Overconcentration refers to the risky practice of investing large percentages of your portfolio in one security, one sector of the economy, or one type of investment. Your grandmother might have called it “putting all your eggs in one basket.”
Unless you can afford to play with extreme high risk, most financial experts recommend no more than 5% of your assets be put into any one given investment. But while the rule is simple enough to understand, catching overconcentration can actually be tricky.
How to Evaluate Overconcentration
Investment Overconcentration is difficult to spot due to the many mutual fund and basket-like products brokers can offer their clients. You may have three different mutual funds that actually all invest in the same industry, even though their names sound diverse. You may own both individual stocks and mutual funds and think you are diversified only to learn in a stock market crash that those mutual funds were also heavily invested in the same individual stocks you already owned. To protect yourself against overconcentration you must:
- Know how your portfolio is distributed: What percentage is invested in stocks? What percentage is in bonds? These percentages should be in line with your retirement goals. (See Also: Improper Asset Allocation)
- Know which sectors of the economy you are invested in. Are all your assets in Real Estate? Do you have too many investments in Tech or Entertainment?
- Understand exactly what investments are held within your mutual funds so you can evaluate the above completely.
Isn’t my Broker Supposed to Diversify my Portfolio?
In a nutshell: Yes. If you have asked your stockbroker for a diversified portfolio, then they are required to recommend products and investments that avoid overconcentration. Unfortunately, inattention or the lure of products that offer brokers high commissions can lead to big losses for the investor. In extreme cases, brokers have overconcentrated in a single, high-risk stock hoping for exponential gains, most often earning only significant losses for their clients.
If you depend upon your brokerage firm or stockbroker to recommend a diversified portfolio and believe that Overconcentration has lost you more than you expected during the recent downturn, Contact Us Now. We have extensive experience in evaluating and prosecuting cases for victims of stockbroker misconduct.