Returns Achieved in a Portfolio Can Be Hidden Risks

Is Your Portfolio Over Concentrated?

Many investors tend not to worry too much about the mutual funds in their portfolios. After all, funds are supposed to provide some shelter from market volatility through diversification. But in some cases, investors don’t realize that a portfolio problem has surfaced until after the damage has been done.

Many funds are well diversified and provide consistent returns in many market environments. But some funds might be heavily concentrated in a handful of stocks or a particular sector of the market. These are potential problems. While these funds can sometimes provide competitive returns during certain periods, other times they can potentially suffer significant losses and harm your portfolio.

In some cases, the problem is that too many of the fund’s assets are invested in one sector or in only a handful of stocks. For example, certain industries tend to do better or worse as economic conditions change. And some fund managers seek to capitalize on the potential for strong returns from stocks in a sector that may be coming into favor. This could be an advantage to shareholders, should the manager’s strategy result in high fund returns. But even if a sector is poised to do well, there are risks involved in allocating too many assets to one industry. For instance, if the manager is unable to reduce the fund’s allocation in a sector when economic conditions change; fund shareholders could be hit with significant losses if the sector falls out of favor.

Fund managers and even individual investors often look at company financial statements for clues to the potential future performance of a stock. But sometimes, a stock’s performance can be impacted by items that are not seen on the financial statements. Stocks can go in and out of favor for many other reasons: a successful new product; lower raw material costs, accounting problems or scandals.

You don’t necessarily have to avoid these funds. But if you discover that one of your current funds is concentrated in a specific area, you should be mindful of the risks this could present.

Do you want to know if you have any potential problems with over concentration in your portfolio? Please contact us for a free analysis of the risks your portfolio could be exposed to.

Mutual funds are investments involving risk and are offered by prospectus only. Investment return and principal value will fluctuate so that upon redemption an investor's shares may be worth more or less than original value. An investor should consider the investment objectives, risks, charges and expenses before investing. The fund prospectus contains this and other information about the investment company. For a copy of the prospectus, please contact your financial advisor. Please read the prospectus carefully prior to investing.

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