Portfolio Concentration Risk: How to Spot It
Quick Answer
Portfolio concentration risk occurs when too much of your wealth is tied to a single investment, sector, or market. Warning signs include any position over 10% of your portfolio, a single sector exceeding 30%, or over 80% in one country. Concentration can boost returns when that investment does well, but it can devastate your portfolio when it doesn't.
What Is Concentration Risk?
Concentration risk is the potential for outsized losses because too much of your portfolio depends on one thing going right. It can appear in several forms: a single stock (like company shares from your employer), a sector (tech-heavy portfolios), a geography (all U.S. stocks), or even an asset class (100% stocks with no bonds).
Common Signs of Concentration
Watch for these warning signs: (1) Any single stock is more than 10% of your total investments. (2) One sector represents more than 30% of your stock allocation. (3) You have more than 80% in a single country or region. (4) Your entire portfolio moves up or down together—true diversification means some holdings zig while others zag.
How Concentration Builds Up
Concentration often happens gradually. A winning stock grows to dominate your portfolio. Employer stock accumulates through RSUs or stock options. You buy several funds that all hold the same popular companies. Regular portfolio reviews help you catch concentration before it becomes extreme.
The Hidden Concentration in Index Funds
Even index funds can be concentrated. The S&P 500 is market-cap weighted, so the largest companies (Apple, Microsoft, Amazon, etc.) represent a significant portion. As of recent years, the top 10 stocks often account for 25-30% of the index. This isn't necessarily bad, but it's worth understanding.
Questions to Ask Yourself
Review your portfolio with these questions: If my largest holding dropped 50%, how would I feel? If my top sector had a bad year, what would happen to my total portfolio? Am I relying on one company, industry, or country for most of my returns? The answers can reveal hidden concentration risk.
Frequently Asked Questions
Is concentration always bad?
Not always. Concentrated portfolios can outperform if you're right about your picks. However, concentration increases the range of outcomes—both upside and downside. Most investors benefit from diversification because predicting winners consistently is extremely difficult.
How do I reduce concentration risk?
You can sell some of the concentrated position and diversify, use broad index funds to balance single-stock exposure, or stop adding to already-large positions. If you have company stock with tax implications, consider a gradual diversification plan.
What percentage is too concentrated?
There's no universal rule, but common guidelines suggest keeping individual stocks under 5-10%, sectors under 25-30%, and maintaining some international exposure. Your appropriate level depends on your risk tolerance and financial situation.
Does my 401(k) count?
Yes. Your total financial picture matters, not just individual accounts. If your 401(k) is heavily invested in company stock, that concentration affects your overall risk even if your brokerage account is diversified.
Educational Only / Not Investment Advice: This content is for educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any securities. Investment decisions should be based on your individual circumstances and made in consultation with a qualified financial professional. Past performance does not guarantee future results.
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