Concentration Risk: The Implications of Putting All Your Eggs in One Basket

Concentration risk occurs when a large portion of a portfolio's holdings is in a particular investment relative to the overall portfolio. This can be caused or perpetuated through:

  • >> Intentional Concentration, or making a conscious decision to investment a significant amount of money in a given asset;
  • Company Stock Concentration, which can occur when an employee invests retirement savings heavily in an employer's stock;
  • Correlated Assets, which occurs with investments within the same field or industry such that the performance of one holding directly affects another;
  • Illiquid Investments, which includes investments in non-traded real estate investment trusts (REITs) and other complex investments;
  • Asset Performance, which occurs when one investment far outperforms others in a portfolio such that the outstanding investment now far outnumbers other holdings.

The risk imposed by concentration means that portfolio performance is so dependent on one or two investments, indexes, or other variables, that if this one security or asset-type was to fail or otherwise perform poorly, the portfolio would be susceptible to sizable losses or damages. To mitigate concentration risk, FINRA recommends the following courses of action:

>>Diversification Across Asset Classes so that not only are investments spread over multiple holdings, they are spread over multiple classes in order to avoid correlated asset concentration risk.

>> Regular rebalance and reviews of the portfolio allow potential issues of risk to be detected sooner so that adjustments can be made to minimize risk.

>> Research of mutual funds and ETFs empowers the investor with education and knowledge and allows for the recognition of the aforementioned signs of concentration risk so that corrective action may be taken.

>> Know how to sell the investments and create an exit strategy straightaway so that when times get tough or risk factors increase, the gameplan is already in place allowing for a turnkey transition to asset protection.

If you have invested with a broker, financial adviser or firm whose investment recommendations have manufactured concentration risk or otherwise put your interests in jeopardy and susceptible to financial losses, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.

Smart Investing: Concentrate on Concentration Risk (FINRA)

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