A fundamental principle of investment is diversification. A diverse portfolio can help limit risk and mitigate losses. This principle includes over concentration at a company level or at a market level. A sufficiently diverse investment portfolio can protect individual investors from sustaining extreme 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 investment.
A properly diversified portfolio should include investments in different companies, different market sectors, and different types of investment as well. 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 extreme example might include investors who were overly invested in dot-com type companies at the time that market began to fail, but even a more limited market failure can be devastating to an over concentrated investor.
- Investing in only one type of security, or asset class. For best risk management, your stock portfolio should include a mix of types of investment, 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 individual profile, heavy concentration in some areas 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 that you or someone close to you has suffered serious investment losses as a result of over concentration, please consult with an experienced stock fraud attorney. Our securities fraud attorneys offer free initial consultations, and can help you evaluate your investment history to determine whether your portfolio sustained losses as a result of over concentration. If you have been victimized, we’ll fight to get your money back.