Excess Concentration Can Prove Disastrous During Economic Downturn

Attorney Advising Disclaimer

Over the years, FINRA, SEC, and other regulators have warned broker-dealers and investors alike about the dangers of over-concentrating positions in one stock or sector. Our primer on the subject, "Concentration Risk: The Implications of Putting All Your Eggs in One Basket," illustrates some of the various dangers posed by investing too heavily in one entity.

Now, with the coronavirus pandemic's negative influence over the stock market, investors whose portfolios rely too heavily on one securities product or area, such as the fledgling oil-and-gas/energy sector, will acutely experience the detrimental effect of over-concentration.

Given FINRA's track record of repeatedly disciplining brokers and firms for failing to diversify investor portfolios by unsuitably overconcentrating funds at great risk to their clients—quite often in violation of firm and/or industry rules—it follows that damages suffered as a result of overconcentration during 2020's COVID-19 market downturn similarly is subject to recourse.

In 2018, Reuters reported on a new investment strategy at Fidelity's Freedom Funds (Study: Fidelity Increased Risk for 6 Million Retirement Savers), and we quickly drew the following conclusion: "According to the report, the new method, which increases concentration in stocks—including nearly $2 billion of its net assets in emerging market equities, such as Chinese stocks—does well as long as the market is strong, but exposes customers to large risk and potential losses if volatility kicks in and the market falls."

One researcher described high-concentration funds as "a time bomb," and as it turns out, due to volatility and the corona virus, that bomb has gone off.

If you have invested with any broker, financial adviser, or brokerage firm whose recommendation to invest in a risky complex product or whose unsuitable strategy of over-concentration has proven harmful to your investments or interests, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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