Diversification is a tenant of investing and the key to personal wealth. This most basic principal is taught to and known by every financial advisor licensed under FINRA (Financial Industry Regulatory Authority). But when certain industries are hot, like the dot com bubble of the late 90s and the real estate boom of the 2000s, diversification becomes and unpopular move. Brokers are typically paid a percentage of the value they add to an investor’s portfolio and are therefore incentivized to place an investors assets in industries performing at the top of the market. However, if an investor’s portfolio becomes over concentrated in a particular industry, it is likely to mimic the performance of that industry. This is good news when the industry is performing well, but detrimental when it is not. A stockbroker who fails to diversify an investor’s portfolio maybe responsible for the losses sustained by the investor.
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