A National Securities Arbitration & Investment Fraud Law Firm

American Association for Jusice
Legal Leaders
Multi-Million Dollar Advocates Forum
Top 100
Public Justice
AV Preeminent
Florida Legal Elite 2011
5th Annual Most Effective Lawyers 2009

Risk of Securities Concentration

Most investors know that the more diverse their portfolio is, the chances of suffering severe losses decreases. However, achieving and maintaining investment diversity can be challenging. Sometimes, an investor’s portfolio suffers from securities concentration. The following discusses some of the risks of concentration and ways to identify that risk.

Securities Concentration

Investors with securities concentration are at risk of suffering magnified losses that may occur due to having a large portion of their holdings in one particular investment class or market segment in relation to their overall portfolio. Concentration may occur for numerous reasons, including, but not limited to:

  1. The recommendation of a stockbroker;
  2. The belief that a particular investment or sector will outperform its peers or an index;
  3. The investor places too much of their retirement savings in the stock of his or her employer; or
  4. One asset outperforming the rest of the portfolio. For example, stock holdings may become a significantly greater percentage of a portfolio because the stock gained more value than bond holdings.

If the investor obtains the help of a stockbroker, any investment recommendation should take into consideration the total composition of the investor’s portfolio. A failure to recommend a strategy that manages the risk of concentration may raise a cause of action for broker negligence, unsuitable investment advice, or a violation of the Financial Industry Regulatory Authority (FINRA) sales practice rules and regulations.

Ways to Manage Concentration Risk

The following are just some of the ways in which investors can help mitigate the risk of securities concentration:

  • Diversify, which can be accomplished by:
    • Holding multiple asset classes (for example, stocks, bonds, real estate), securities in different sectors (for example, retail, medical, manufacturing), various bond types (for example, corporate, municipal, Treasury) with different issuers and maturity dates
    • Investing in mutual funds and exchange traded funds (ETFs)
  • Frequently review portfolio holdings and make adjustments to keep the portfolio in line with investment objectives
  • Examine mutual fund/ETFs held:
    • Consider whether the funds are holding positions in similar companies or whether there is overlap with individual stocks or bonds you hold
    • Keep in mind that some funds are very specifically targeted; investing in funds does not assure you are protected from concentration risk
  • Understand the liquidity of portfolio:
    • Having too much concentration can lead to a lack of liquidity, meaning it may be difficult to sell the asset or security without affecting the asset or security’s price. This can lead to underperformance as compared to a more diversified portfolio
Protect Yourself

While securities concentration can occur through no one’s fault, it is also possible for a stockbroker, intentionally or negligently, to lead an investor into a position of too much concentration. In cases like this, it may be possible for the investor to recover under the FINRA arbitration or mediation processes. For more information, speak with an experienced securities law attorney today. At Silver Law Group, we proudly help investors harmed by stockbroker misconduct.

Client Reviews
“My in-laws lost their retirement funds to a dishonest broker. Silver Law Group and Scott Silver aggressively pursued their losses until he got their money back.” Ben M.
“I foolishly gave my money to a con artist promising me a great return on my money. Scott Silver zealously handled the matter, recovering my losses.” Darren S.
“I almost lost a lifetime of earnings after trusting the wrong person. Silver Law Group guided me through the arbitration process and a mediation, always fully prepared and committed to my case.” Scott T.