Diversification is a strategy for managing a portfolio to limit risk. Instead of all of the investments being concentrated in one sector, they are diversified among a variety of sectors. The logic behind this being that it is less likely that all of the major sectors will be hit with a significant downturn rather than one sector or one stock. It is a broker's responsibility to advise clients to diversify their portfolio to reduce risk.

If a broker puts the vast majority of a client's total investment holdings into one sector and then the investments decline significantly, the broker may be liable if the investments decline in value.

For example, if your portfolio is heavily weighted to biotechnology stocks and those biotechnology stocks decline sharply, you may have a right to compensation on the basis that the broker should have diversified your risk. Many investors were hammered after the internet stock bubble collapse because their brokers irresponsibly heavily weighted them in speculative internet investments.

If you believe you have been victimized by stockbroker fraud or mismanagement, you should inquire about your legal rights.