Overconcentration and Failure to Diversify

Overconcentration occurs when a portfolio invests a disproportionately large percent of its assets in a single stock, industry or sector. Overconcentration exposes investors to increased risk. Financial professionals have a duty to protect their customers from unnecessary risk through asset allocation and diversification. A well managed portfolio is one that is both properly allocated and well diversified. A failure of one—or both—of these requirements often leads to securities disputes.

Asset Allocation

The goal of asset allocation is to balance investment risk and reward according to the customer's particular investment objectives. Asset allocation is accomplished by apportioning an investment portfolio among the three main classes of investment: equities, fixed income and cash equivalents. Generally speaking, a portfolio that has a higher concentration in equities or stocks is much riskier than a portfolio that holds mostly investment grade bonds. Thus, it would be improper for a conservative investor to be placed in a portfolio that has a heavy concentration in stocks or equities.


Diversification is another important risk management technique that is accomplished by having a wide range of investments within a portfolio. The greater the variety of stocks or bonds held in a portfolio, the greater the benefits of diversification will be. A poorly diversified portfolio is one that is invested in only a handful of stocks or is overly invested in a single industry or sector, such as technology or financial services.