Failure to Diversify or Over Concentrate a Portfolio Could Be Fraud Finance Articles | May 23 Chris Archer Womens Jersey , 2008 When seeking out an experienced investor to help ensure that your financials are well taken care of, it's important for an individual to look at the track record of an individual or company's failure to diversify, which is when an investor does not apply financials to a wide range of opportunities within a portfolio, and if this occurs and an individual loses money Jung-ho Kang Womens Jersey , they may be entitled to a lawsuit.
When an individual seeks out a company or individual to invest their finances in, it can be a difficult, scary and sometimes costly decision. Often, individuals invest without first knowing their rights and how to protect their portfolio. One example of protecting a portfolio is knowing about failure to diversify. It is considered stock fraud through concentration.
Diversification of investment holdings is the most important shield against risk. Since some investments rise in value while others fall Starling Marte Womens Jersey , diversification smoothes out some of the volatility of the overall return from a portfolio. Diversification may sacrifice some of the upside potential, but should be more than offset by the benefits of lower levels of risk.
Diversification is a strategy for managing a customer portfolio to limit risk. Instead of all the investments being concentrated in one market sector, investments are diversified among a variety of industry sectors and types of security.
Therefore, as it is less likely that all of the major sectors or specific types will be hit with a significant downturn at once the portfolio contains less risk.
It is a broker's responsibility to advise clients to diversify their portfolio to reduce risk. Proper diversification is the foremost issue in all-efficient investments Kent Tekulve Womens Jersey , especially when individual stocks are purchased.
The risk of loss increases greatly when failure to diversify occurs and an investment portfolio is over-concentrated within a particular type or industry sector or security. It is the broker's obligatory duty to inform a client of risks and actions that attribute to these risks. Over concentration in an account that contains only one individual investment is easy to recognize. Accounts may also be over concentrated if they:
* Contain only common stocks (including mutual funds that invest in common stocks) rather than a mix of common stocks, preferred stocks, and debt instruments (bonds).
* Contain investments that are limited to one particular industry (such as telecommunications) or industry sector (such as health care or finance).
Brokers are obligated to carefully evaluate each client's investment goals to provide for adequate portfolio diversification and not give up potential returns. If a broker places the vast majority of a client's total investment holdings in one sector, and this sector declines significantly Roberto Clemente Womens Jersey , the broker may be liable.
All investors are unique, and careful strategies must be employed to properly diversify a client portfolio. Failure to do so can result in negligence and malpractice liability when that portfolio sustains significant losses.
The cause of action for negligence or malpractice is based upon the duty owed by the broker to the customer and the breach of that duty, including the duty to exercise due care in connection with the account. This activity, whether accidental or not may still be considered negligent misrepresentations Willie Stargell Womens Jersey , especially if finances are lost.
Failing to properly diversify the customer's account may also be considered negligent management of an account.
In general, reports have shown that:
* Smaller companies typically have higher risk of failure.
* When investing, it's important to note that the markets with higher market volatility are the smaller-company stocks.
* Foreign securities have additional risks.
* Emerging markets typically have higher risk because they are underdeveloped markets.
The right level of diversification for a client depends upon a variety of factors, including the individual's financial position and long and short term financial goals Francisco Cervelli Jersey , and how the market is performing. Many portfolios are not properly diversified and therefore an extended risk is being taken.
Article Tags: Common Stocks
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