Overconcentration Can Be a Problem When Investing

MORE BASKETS NEEDED

Putting all your eggs in one basket is a bad idea according to one age old idiom, since to do so means risking everything should the basket be dropped.

When it comes to investing the family nest egg this idiom is a good one to keep in mind, since diversification is the only way to limit risk. Diversification means that you should spread your investments among a number of stocks and sectors so that if something goes wrong it one “basket”, you be protected by having a part of your investment in other “baskets”.

In our practice, over-concentration is one of the more common abuses we see our clients subjected to.

Examples of over-concentration are:

  • Putting all or a large percentage of your portfolio in a single stock, or
  • Putting all or a large percentage of your portfolio in a single sector of the market (ie; energy sector, technology sector , etc.)

For those who experienced the 2000 technology market crash, no explanation is needed as to why it would have been better to have owned a diversified portfolio rather than one made up primarily of technology stocks. 

If that one company or sector you are heavily invested in collapses, you could experience damages that would permanently affect your ability to retire or if already retired, to remain so. Likewise if you are too heavily weighted in a single sector of the market and that sector is hit, you will wish you had been diversified.

Most people hire a stockbroker or financial adviser to gain from his or her wisdom and the supervisory oversight the employing firm is required to conduct over the way the broker handles your accounts. In return you pay commissions or a fee for these services and have the right to expect that your account (which often represents your life savings) is handled in a manner consistent with your desires and risk tolerance.

Here is a list of some of the worst performing stocks for 2012. If you had a large position in any of them, it is likely that you have experienced meaningful losses.

NI Holdings                             NIHD

Arkansas Best Corp.                ABFS

Hewlett Packard                       HPQ

Basic Energy Services               BAS

Cliffs Natural Resources            CLF

Allegheny Technologies             ATI

Dell Inc.                                      DELL

Exelon Corp.                               EXC

Northern Oil & Gas                     NOG

Windstream Corp.                       WIN

Groupon, Inc.                              GRPN

If you have experienced losses as a result of being heavily invested in a single stock or sector, you may be able to recover your losses through FINRA arbitration. Call us if you have questions about stock market losses.

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Rex Securities Law

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