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Overconcentration

April 3, 2017

 

...excerpt from Mo Lidsky's latest book, Partners in Preservation

 

Studies demonstrate that most investors don’t understand basic investment and financial concepts, including diversification, compound interest, risk/return, and securities fraud. Most aren’t really aware of investment costs or the impact of those costs on investment returns. That is just one explanation for why so few retain wealth over long periods of time. J.P. Morgan Private Bank conducted a study of all those listed on the Forbes 400 (i.e., America’s four hundred wealthiest individuals) between 1982 and 2003. Over those two decades, fewer than 15 percent of these individuals retained their spot on the list. What was most responsible for this erosion of wealth? Overconcentration. Invariably, the job of creating wealth gets confused with the job of preserving it. Investors feel safest within the asset class or the field they know best, but poorly diversified portfolios provide express tickets to the land of wealth reduction.

 

One of the first challenges of good advisors is to properly educate investors about all asset classes and investment strategies, informing them how to leverage all the options that may be available to them.

 

 

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