By utilizing diversification as the dominant factor in portfolio construction, professional liability arising from an absence of suitability or prudence may be minimized.

Diversification helps investment managers fulfill their fiduciary responsibility to their customers. The law has evolved to subject their rationale to the "prudent investor rule." Investment managers have fulfilled their legal duties, as fiduciaries, if their investment decisions-win or lose-would be decisions made by a prudent man. In 1976, the U.S. Department of Labor, the government body responsible for Employee Retirement Income Security Act (ERISA), determined that questions of prudence regarding mutual fund investing would be decided on the merits of diversification, not on the basis of individual stock selection.

This mode of thinking seems to be in favor with market regulators, yet some practitioners have difficulty following the play list.

Ignoring portfolio diversification creates risks you cannot ignore.