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Why It’s Important to Diversify Your Investment Portfolio

Simms Law, P.C. June 14, 2022

Diversification is the process of including several types of financial instruments in one’s investment portfolio in order to make it less vulnerable to market fluctuations. For example, a diversified portfolio often includes a mixture of stocks and bonds. When the economy is growing, stocks tend to do better than bonds. However, when the economy slows down, bonds tend to outperform stocks. The inclusion of both reduces the odds that a market correction will wipe out an investor’s portfolio. Below is an overview of the importance of investment diversification. 

Benefits Of Diversification 

Diversification is beneficial in several ways, including: 

  • It minimizes the risk of loss,

  • It exposes investors to more opportunities for high returns,

  • It safeguards investors against adverse market cycles, and

  • It reduces overall volatility.

Asset Allocation

There are different ways to diversify one’s investment portfolio. However, the most popular form of diversification is asset allocation. Asset allocation is the process of including elements of different investment classes in one’s portfolio, such as bonds, stocks, gold, cash, real estate, and other commodities. This diversification strategy provides additional protection to investors from losses suffered by a particular commodity or industry. Stocks and bonds provide a good example of how this strategy works. When stock prices fall, bond prices tend to rise. Therefore, a portfolio that includes stocks and bonds will likely perform better than a portfolio that only contains one or the other. 

When Brokers Fail to Diversify 

Financial advisors and brokers must comply with the rules and guidelines of the Financial Industry Regulatory Authority (“FINRA”). When investors lose money because brokers or financial advisors fail to follow FINRA’s rules, these investors may have legal recourse. FINRA Rule 2111 requires financial advisors and brokers to have a reasonable basis for their investment recommendations, and they may only propose investment options that suit the specific needs of their individual clients. Investment strategies that are too risky are generally considered unsuitable. And a big part of risk reduction and compliance with the above rule is the creation of diversified portfolios by financial advisors and brokers. Therefore, when a broker or financial advisor fails to property diversify an investor’s portfolio, the investor may be entitled to compensation for any resulting financial losses. If you have lost money due to a broker or financial advisor’s failure to diversify your portfolio, it is important that you contact an investor representation attorney as soon as possible. 

Fort Lauderdale Investor Representation Attorney 

At Simms Law, P.A., we believe that financial advisors and brokers should be held to a high standard of conduct. Financial professionals are obligated to act in the best interests of their clients. When they fail to do so, we believe they should face consequences for their actions—including paying back their clients for any unnecessary investment losses. If you’ve lost money due to the actions of a financial professional, please contact us today for a consultation.