Overexposure

DEFINITION of overexposure

Overexposure is the state of taking on too much risk.

WHAT IT IS IN ESSENCE

For example, a mutual fund may be overexposed to the financial sector by buying too many stocks in banks relative to its stocks in other industries.

Meaning, the trader makes the technical mistake of investing too much in a particular opportunity.

Increasing exposure offers the chance for greater profit from a position but comes at a greater risk. Overexposure is when a trader believes that a trade’s profit potential is so high that they increase exposure to unreasonable levels.

Almost all trades involve risk, and an overexposed position can end up incurring significant losses even when you’ve undertaken measures to limit your risk. Being overexposed on a leveraged trade can mean ending up with losses that exceed your initial deposit.

HOW TO USE

A lot of people, too unintentionally invest like daredevils based on the belief that they’ve got the right stocks/cash mix. After tripping on the high-wire that they realize there’s no safety net below. That their portfolios weren’t actually as diversified as they assumed.

The reason for this devastating diversification mistake is simple: failing to factor one’s entire empire (no matter how small) into the asset allocation equation.

Every trader needs to decide exactly how you want your assets weighted.

Because overexposure is the state of taking on too much risk.

If you have one account that contains the majority of your assets, that’s good. Concentrate on rebalancing in that account, particularly if it’s a tax-advantaged account that doesn’t charge commissions.

Any smaller accounts that are outside your big savings can stay invested as is.

If you have several accounts that are of approximately equal value, treat each account as an individual portfolio. That means moving around the money within those accounts so that each portfolio has roughly the same mix of assets. To avoid getting more fees, pay attention to the accounts tax status.