When does overconcentration/failure to diversify occur?

The proper allocation of investments depends on the investor’s needs and financial circumstances. Some investors can wait longer for a return and are willing and able to accept varying levels of risk. Other investors may need an immediate return and are only willing to accept low or moderate risk. Younger investors have more time to see results than older investors. A good broker reviews all relevant factors first and then recommends a diversified portfolio that best suits the investor’s goals and risk tolerance.

Some examples of overconcentration are:

• Overconcentration in just one company. Investing in one company could cause the investor to lose his/her investment, or see a much lower return than expected.
• Industry overconcentration. Just as individual companies can lose money, industries have their ups and downs, too. Typical market fluctuations can cause an industry sector to suffer, as can foreign competition, U.S. competition, the introduction of better products, and fears about the economy. Investing only in one sector of the economy is a mistake.
• Failure to diversify by product type. A good portfolio should consider investments in equities, bonds, and cash. Investing in multiple investment products will reduce volatility and allow for better returns over the long haul.

Stockbrokers should review which investments are best for short term versus long term, which investments are high risk/high reward, which investments are likely to produce steady income, and which investments have underlying costs that negate positive returns. A diversified portfolio should meet the expectations of the client and should take into consideration all of the risks and rewards that different product types and industry sectors may provide.