The Dow Jones dropped more than 600 points today in response to the Brexit vote. This was reportedly the its eighth-largest point loss ever. Meanwhile, the S&P 500 dropped more than 70 points today. Certain financial company stocks dropped significantly as well. Among them were Barclays, which dropped more than 20% and RBS who saw a 27% decline. The financial sector as a whole reportedly had its worst day since 2011 dropping 5.4%.
While all of this may make the evening news more interesting to watch, the concerns on many people’s minds are undoubtedly, “How will this affect me and my portfolio?” Especially with baby-boomers retiring each and every day, retirement portfolio losses so close to one’s retirement could be unrecoverable.
One of the first things to look at to see if your portfolio was significantly affected would be to examine at your exposure to the UK and your exposure to the financial sector.
Significant exposure to one particular country, region, sector, etc. is called “concentration.” When a portfolio has too much exposure to a particular country, region, sector, etc., it is called “over-concentration.” This is the opposite of “diversification.” Concentration, and more so over-concentration, can have a devastating effect on a portfolio when the country, sector, region, etc. that the portfolio is over-concentrated in performs poorly.
For example, applying this to Brexit, if you have a portfolio concentrated in British financial stocks, chances are that you will hold significant portions of RBS and Barclays. If that is the case, that significant portion of your portfolio would have lost somewhere between 20% and 27% in one day. That is not a loss that most people would want to experience in such a short time. Now, if that represents your life-savings, you could have a significant problem on your hands.
For this reason, financial advisors are discouraged from concentrating their clients’ portfolios. In fact, FINRA (the Financial Industry Regulatory Authority) has made concentration – especially in high risk securities – a priority for 2016: “A related area where FINRA has observed deficiencies is firms’ failure to adequately monitor for excess concentration. This includes situations where firms—or branches—focus on more risky products without attendant measures to ensure suitable recommendations and avoid excess concentration.”
Even though FINRA is watching out for it, concentration can still be a risk in your portfolio. The securities lawyers at Malecki Law have experience representing defrauded investors who have lost substantial money due to overconcentration and have successfully helped those clients recover much of their losses.