Failure to Diversify or Overconcentration of Investments in Accounts Can Create Unnecessary Risk

One of the most fundamental rules of investing is to diversify your portfolio. Putting a large percentage of your money into one stock or one category of investment can put you at serious risk of financial loss if the company or industry fails to perform as expected. It is your financial advisor’s responsibility to recommend the right mix of investments to help you reach your goals without exposing you to excessive risk.

It is widely understood in the securities industry that investors need proper asset allocation, which is diversification among various asset classes; i.e., cash, bonds, and equities.  They also need further diversification by geography, sector, issuers, styles, credit ratings, etc.  Brokerage firms understand the importance of asset allocation and diversification.  For example, one firm published the following in its marketing materials:

No single asset class performs best in all economic environments.  Therefore, experts suggest that a sound investment portfolio should be diversified – that is, invested in a variety of asset classes that have distinct, yet complementary, characteristics.

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Rather than just one asset class, an asset allocation strategy includes a blend of different investments that reflects your specific financial goals and tolerance for risk.  The graph below illustrates three sample asset allocation strategies classified by asset type and risk tolerance.  These sample asset allocations are designed for illustrative purposes and provide an example of how each strategy might be structured.

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The easy to understand explanation for asset allocation and diversification is simply you “do not put all of your eggs in one basket.”  In fact, it has been determined that 91.5% of a portfolio’s performance is a direct result of asset allocation, whereas only 6.7% of the performance is linked to security selection and a mere 1.7% to market timing.

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Many of our cases in the last seven years have involved a broker’s failure to diversify investors’ accounts. For example, thousands of investors in Puerto Rico lost billions of dollars because Puerto Rico brokerage firms over-concentrated their best clients’ accounts in Puerto Rico bonds and Puerto Rico denominated closed-end bond funds, which could only be purchased by residents of the island. The over-concentration of clients’ assets in fixed income securities of a single geographic area was a disaster when the Puerto Rico credit market collapsed in September 2013. Another example is the impact the March 2020 COVID-19 market crash had on investors whose assets were over-concentrated in the energy, hotel, airline, and/or cruise-line industries. Those investors who held diversified portfolios weathered the storm while the others suffered significant losses, particularly those investors with leveraged and over-concentrated accounts that received margin calls and were forcibly liquidated.

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FREE INITIAL CONSULTATION WITH ATTORNEYS WHO CAN HANDLE YOUR CASE

If you have suffered a loss to the value of your retirement accounts because your advisor recommended a strategy that over-concentrated your portfolio or there was a lack of diversification, you may have grounds for a claim to recover your losses. Speak to Attorney Pearce, an experienced lawyer, representing clients throughout Florida and nationwide. Please contact our office online, or call 1-800-732-2889 to schedule your free consultation.