Concentration risk

The risk that a large share of your wealth depends on a single outcome - one company, sector, property, currency, employer or counterparty.

Example

A holding at 60% of a portfolio falling 60% removes 36% of everything; the same holding at 10% removes 6%.

Important

Count exposures by what would make them fall together, not by how many line items you own. Twelve shares in one sector is one position, and your salary usually belongs in the count too.

Related terms

• Position size — How much of your total capital a single holding represents - the weight that decides how much any given move actually matters to you.
• Permanent loss of capital — Money that is gone for good - the business failed, the asset became worthless, or it was sold at the bottom and never bought back.
• Drawdown — The decline from an investment's highest point to its lowest point before it recovers.

Lessons that explain it

• Sometimes the only thing that rose, sometimes the thing that fell furthest — It genuinely protects a portfolio in some shocks and genuinely makes them worse in others, and the average of those two behaviours describes neither. That is the honest case, and it is a case for a small deliberate position. (10 min)
• A sized bet, renewed on purpose — If it belongs anywhere, it belongs as a position small enough that a total loss is survivable - and the diversification argument most often used to justify it has a habit of failing in exactly the weeks it is needed. (9 min)
• For most readers, nowhere - and the exceptions are narrow — Derivatives can hedge specific risks or adjust a portfolio at a known cost, but they are not needed to invest well, and for most people the right allocation is zero. (8 min)
• Why diversification works — Spreading money across many holdings does not raise your expected return. It changes the range of outcomes around it - and in particular it removes the ones you cannot come back from. (11 min)
• When concentration is the right call — Diversification is the correct default and it is not a law. The honest version of the argument is about what you would have to actually possess to justify departing from it. (10 min)
• The first ten holdings do most of the work; the next fifty do much less — Adding holdings reduces the damage any single failure can do, but the benefit falls away quickly. Beyond a point, more names add admin and dilute your best ideas without removing much risk. (10 min)

All 578 terms in the Investing glossary