The Dow Dropped Mid Trade War Escalations: Do I have a right to sue my broker when my securities portfolio drops with the market?

In the “worst day of 2019” for the market, the Dow Jones Industrial Average dropped 767 points by closing on Monday. When the market suddenly drops, investment portfolios will reflect not only the fluctuations but also the risks inherent in that particular strategy. All securities carry risk, but some investment products have more than others. Risk tolerance refers to the level of uncertainty in investment performance that is acceptable to the investor. An investor’s risk tolerance is reflective of their financial situation, needs, age, objectives, time requirements, and other considerations. Generally, investors can be categorized within varying levels of conservative, moderate, or aggressive. The types of investments in an investor’s portfolio should reflect their risk tolerance. The changes that investors noticed in their portfolio during market shifts could be indicative of where their portfolio falls on this spectrum.

Investors with the lower risk tolerances should have a conservative investment strategy in place that shields their portfolio from significant declines in market downturns. The goal of conservative investors is to prioritize principal protection and liquidity over risky appreciation. A conservative investment portfolio will be mainly comprised of safer, low-risk fixed-income investments, such as bonds and certificates of deposits. While low-risk investments do not generate the highest returns, the chances of losing principal are much lower. Older individuals closer to retirement should have investment profiles that reflect a more conservative investment portfolio. It is a huge red flag for any conservative investors to have noticed a complete decline in their portfolio from the market downturn.

Aggressive investment portfolios consist of substantially riskier investments that could potentially produce higher returns. However, these speculative investments come at the cost of potentially losing most or almost all of their principal. Younger investors with the time to recover losses are the demographic group that may be able and/or willing to weather a more aggressive investment strategy. Younger investors can usually benefit from saving as much as possible in retirement accounts in anticipation of the market’s eventual recovery and benefit from the compounding returns. However, investors of all ages who are more apt to want to sell at market downturns immediately should not be in this speculative investment strategy.

Situated in the middle of two extremes, moderate investors can withstand some risk but still protect some of their principal. A moderate investor might notice some losses in the market decline, but not a loss of the majority of their principle. Moderate investors should be comfortable dealing with short-term fluctuations and not panic in moderate market swings. A typical moderately invested portfolio would be comprised of about half the funds in high-risk dividend-paying investments with the remainder in bonds and fixed income assets.

Of course, regardless of the type of investor you are, if your broker or investment advisor misled you as to the safety of certain investments, overconcentrated you in one product or sector (i.e., technology or healthcare or oil, etc.), churned or overtraded your account, you obviously have cause to complain and sue.  While you can’t predict the market, you should be sure that your portfolio consists of investments that align with your risk tolerance. If you lost money that you immediately need, this is a strong indication that you are in the wrong investments.

Make sure that you and your broker are on the same page regarding the type of investment portfolio that is best for your risk tolerance. Brokers are legally obligated only to recommend investments that are deemed suitable for your investment portfolio, under FINRA rule 2111. If you find that the performance of your investments might not match your investment portfolio, consider pursuing legal action.

Our securities attorneys have ample experience with examining investor portfolios and recovering any unjust losses in FINRA arbitration. Investors with reason to believe that their investment portfolios are unsuitable can learn their recovery rights in a free consultation with our securities fraud lawyers.