Working with financial advisors is my privilege.  Taking care of clients is theirs.

Years ago, I asked a friend and mentor to me, “How much of your stock investments are in international?”  He replied, “about 92%.”  The look on my face must have been like that of a guest on The Jerry Springer show, as he began to laugh. “James, you have to understand, I am from Ireland.”  (more impactful when read with an Irish accent).  A fungible lesson in perspective that was part of my conversations about diversification this past month.  My colleague at Strategas, Todd Sohn, has been writing about increased “concentration risk” investors are currently facing (link to Todd's most recent work on concentration: ETF Video – Concentration and Themes Update)*. This was a consistent discussion topic in my February travels centered around how concentration risk may impact investors.  While concentration risk can work in both directions, up and down, the concern has shifted to downside risk.  One way to protect from downside concentration risk is diversification.  In investing in stocks, owning something “different” is, diversifying.  One way to measure that difference is “Active Share.”  Active Share ranges from 0% - 100% and is commonly measured relative to a benchmark of stocks, like the S&P 500 Index.  The higher the Active Share, the more different the investment is from its benchmark.  Below are some examples of stock market risks, and where understanding Active Share may be beneficial.

Systematic Risk (Market Risk) – While by definition, this type of risk is widespread, it is commonly understood that Systematic Risk (caused by macroeconomic factors, i.e., inflation) is non-diversifiable.  NOTE: Macroeconomic factors can affect investments in different ways, which leads to Unsystematic Risk.

Unsystematic Risk (Specific Risk) – This type of risk is to an industry, sector, or stock and is diversifiable.  Active Share is a way to show that level of diversification. 

Liquidity Risk – More common in the fixed income markets, liquidity risk exists in the equity markets as well.  Put simply, Liquidity Risk is when you want to sell a stock for a fair value, but no one is willing to pay that price.  We saw this play out dramatically in the recession of 2008-2009. 

There are additional risks in investing in stocks, including, but not limited to: fraud, poor use of capital, market volatility and competition. 

*Concentration risk refers to the potential for financial loss due to overexposure to a single asset, sector, or market within an investment portfolio.

This communication was prepared by Strategas (“we,” “us,” or “our”), a brand that offers investment advisory services through Strategas Asset Management, LLC, an SEC Registered Investment Adviser, and provides research to institutional investors through Strategas Securities, LLC, a broker-dealer and FINRA member firm and an SEC Registered Investment Adviser. Information regarding market or economic trends, or the factors influencing historical or future performance, reflects the opinions of management as of the date of this communication, and are subject to change. This communication is provided for informational purposes only and should not be construed as an offer, recommendation, nor solicitation to buy or sell any specific security, strategy, or investment product. The information contained herein has been obtained from sources we believe to be reliable, but no guarantee of accuracy can be made. This communication does not constitute, nor should it be regarded as, investment research or a research report or securities recommendation and it does not provide information reasonably sufficient upon which to base an investment decision. This is not a complete analysis of every material fact regarding any company, industry, or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. Past performance does not guarantee future results. All investments carry some level of risk, including loss of principal.

Strategas Asset Management, LLC and Strategas Securities, LLC are affiliated with Robert W. Baird & Co. Incorporated ("Baird"), a broker-dealer and FINRA member firm, and an SEC Registered Investment Adviser, although the firms conduct separate and distinct businesses.