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The Importance of Portfolio Diversification

Simms Law, P.C. June 14, 2022

Diversification is a process by which a person includes several kinds of financial instruments in his or her investment portfolio in order to make it less vulnerable to changes in the market. A diversified portfolio usually includes a mixture of stocks, bonds, and other financial instruments. The inclusion of several types of investments reduces the odds that a market correction will sink an investor’s portfolio. In this article, we examine the importance of portfolio diversification.  

Portfolio Diversification Benefits

Diversification helps investors in a number of ways, including: 

  • It increases the opportunity for high returns,

  • It minimizes risk,

  • It protects investors against poor market cycles, and

  • It reduces portfolio volatility.

Asset Allocation Portfolio Diversification 

There are many ways to diversify an investment portfolio. The most popular form of portfolio diversification is asset allocation. Asset allocation is the process of adding different investment classes to an investment portfolio, such as stocks, bonds, gold, real estate, cash, and other commodities. Asset allocation provides investors with additional protection from losses related to a specific commodity or industry. A good example of this strategy is the inclusion of stocks and bonds in one’s portfolio. When stock prices drop, bond prices usually increase. Thus, a portfolio that includes both asset types will probably perform better than a portfolio that only contains one. 

What Happens When Brokers Fail To Diversify?

Financial professionals are required to comply with Financial Industry Regulatory Authority (“FINRA”) rules and guidelines when making investment recommendations. When investors suffer financial losses because financial professionals fail to follow these rules, they may be entitled to financial compensation. One such rule requires financial professionals to have a reasonable basis for the investment recommendations they make to clients, and they are only allowed to make recommendations that suit the specific needs of their clients. If an investment professional suggests a high-risk strategy, this usually involves a lack of diversification. When a financial advisor’s failure to diversify results in losses for his or her client, the client may be able to recoup his or her losses in arbitration or in court. 

Fort Lauderdale Investor Representation Attorney 

If you’ve lost money due to your financial advisor’s failure to diversify your portfolio, you should contact an experienced investor representation attorney as soon as possible. At Simms Law, P.A., we believe that financial advisors, brokers, and other investment professionals should be held to a high standard of conduct. As we discuss above, financial professionals are obligated to act in the best interests of their clients—and this includes avoiding high-risk investment strategies. When a financial professional fails to act in a client’s best interest, we believe he or she should face consequences for his or her actions—including repaying the clients for any unnecessary investment losses. So, if you’ve lost money due to your financial advisor’s failure to diversify your investment portfolio, please contact us today for a consultation.