An important tenet of Modern Portfolio Theory is asset allocation and diversification of investments among the type of investments (e.g., stocks, bonds, cash, etc.), over a mix of industries and economic sectors. Diversification tends to reduce volatility and investment risk over time. Asset allocation by itself is responsible for over 90% of gains and/or losses in an investment portfolio. In simple terms, diversification helps investors avoid the risk associated with “putting all their eggs in one basket.”
Are Your Assets Overconcentrated?
Conversely, overconcentration may occur when a high percentage of a portfolio’s assets are in a single company, product type, industry, or country. Overconcentration tends to increase the risk and magnitude of investment losses, as well as the potential for returns when things go well.
Generally speaking, overconcentration of a portfolio’s assets is unsuitable for most investors. This is a classic type of securities fraud.