Under the New Prudent Investor Rule, diversification is one of the basic investment principles that determine prudent practice, and is normally required of trustees unless it is clearly imprudent to do so.
Can anybody give me an example when it is imprudent to diversify?
Many thanks in advance.
I can only come up with a rather strange example where the IPS requires investment in a rather limited set of investment assets. But in that case, it’s that diversification is imprudent, but rather that it would violate the IPS.
Example… a religious trust only wants to invest in green energy.
I was thinking more of a flight to safety scenario in a tactical situation. For example going to 100% cash & fixed income and 0% equities when the s*** hit the fan in 2007-08.
i have seen this being asked in one of the mocks … and it is imprudent to diversify when the Portfolio IPS does not states so (limitfy diversification)
CFAI book says tax considerations (e.g. owning a low-basis stock) or possible loss of control of a company by selling its stock would be two examples of diversification benefits not outweighing the costs.
many thanks for all the examples given!