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Titled: Portfolio Investments and Understanding Failure to Diversify
Portfolio Investments and Understanding Failure to Diversify
Article Summary: 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, they may be entitled to a lawsu
Failure to diversify a client's portfolio can be a form of stock fraud. In order to protect a client's assets, the broker should vary the types of stock purchased. Stock fraud through over concentration strips the client of the protection diversification affords.
Diversification of investment holdings is the most important shield against risk. Since some investments rise in value while others fall, 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, especially when individual stocks are purchased.
When an investment portfolio or account is over concentrated in a particular security, type of security, or industry sector, the risk of loss in the account is increased. 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 failure to diversify occurs and a client's investment portfolio is placed largely in one sector, and if that sector shows significant losses, an investor 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, 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.
* Smaller-company stocks generally experience a greater degree of market volatility.
* Additional risks are also derived from foreign securities investments.
* 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, and how the market is performing. Many portfolios are not properly diversified and therefore an extended risk is being taken.
Article Source: http://www.upublish.info
About the Author:
Peter Kent
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