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When Is Over-Concentration Considered Fraud?

In today’s economic climate, the market is always in flux and it’s hard to know which of your investments will do well and which might perform poorly. That’s why market experts are constantly advising people not to put all of their eggs in one basket – that is, to have a diversified portfolio. And if you’ve entrusted your portfolio to an investment professional, that’s a rule they should be following in most cases. If your broker or advisor has failed to diversify your investments, you may be a victim of over-concentration. Read on to learn more about over-concentration and when it might be considered fraud.

What Is Over-Concentration?

In the world of investments and securities law, “over-concentration” refers to when you have too many of your holdings in one particular investment, class of investments, or market segment in relation to your whole portfolio. For example, you might invest too much in one company or in one industry, such as technology. Or you could be invested in only one type of security, like common stocks, rather than a mix of stocks and bonds, for example.

The danger over over-concentration is that if something happens to that one investment, or class of investments, you risk losing a large portion of your portfolio. This is what happened to many people who were too invested in the technology industry when the dotcom crash occurred in 2000 and 2001. That’s why experts recommend having a diversified portfolio of investments – your risks are more spread out across the market. And while some investments might lose value, others could increase, leaving your overall portfolio fairly balanced.

When Is Over-Concentration Considered Fraud?

Over-concentration can occur in a number of ways, and it’s not always fraudulent. For example, you may have intentionally invested in one type of asset as a personal preference, or one of your investments may have performed so well that it now represents a much greater percentage of your portfolio than it did before.

However, your broker or financial advisor may also be at fault for your over-concentration. These investment professionals have a duty to ensure that their clients’ investments are properly diversified based on their individual circumstances, instructions, and financial goals. This assessment includes factors such as the client’s age, net worth, and investment experience. Over-concentration is rarely a prudent strategy.

For example, for someone in their 60s who entrusts his or her nest egg to a broker, that broker’s failure to diversify the portfolio and only invest in oil could constitute fraud because of how risky that is for someone who is so close to retirement age. Losing your life savings with no time to ride out the ups and downs of the market is particularly devastating.

Were You a Victim of Over-Concentration? Speak with an Attorney

For many investors, a broker or financial advisor’s failure to diversify the portfolio may constitute fraud based on the client’s profile or instructions. If you entrusted your investments to an investment professional who lost some or all of your money through over-concentration, you may be able to recover those losses by suing them for stock fraud. However, fraudulent over-concentration can be difficult to prove. Contact an experienced securities attorney who can evaluate your case and advise you of your options.

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