Diversification is a strategy used to limit risk in your investment portfolio.
Diversification has two components:
- Diversification among asset classes – equities/stocks, fixed income securities/bonds/treasuries/CDs, and cash.
- Diversification across sectors within those asset classes.
Diversification across asset classes helps cushion an account from severe swings – both up and down. Also, by placing investments in multiple sectors rather than in a single sector the investor takes on less risk. The possibility that all the sectors of a diverse portfolio will suffer losses is much less than the possibility that a single investment or sector will suffer losses.
For this reason, stock-brokers are obligated to advise their clients to diversify in order to decrease risk. If an investor has suffered significant financial damages because their broker placed a large share of his holdings in one sector or in a single stock, this may stand as grounds for legal action.
For example, if a stockbroker places all of your assets into stocks, to the exclusion of fixed income investments and/or cash equivalents, or if your broker concentrated the majority of your stock holdings in pharmaceuticals and subsequently the pharmaceuticals sector suffered huge losses, you may be able to receive compensation on the basis that your investment holdings were not adequately diversified.
If you believe that your broker failed to diversify your account, you may have been a victim of securities fraud. You have certain rights which you should be aware of, rights which may provide you an opportunity to recover your losses from your stockbroker or brokerage firm.