Concentration Risk
Concentration risk is the danger of having too much money in one asset, or in assets that tend to fall together, such as several tech stocks.
Concentration risk is the danger of having too much of your money in one stock, sector, asset or idea. If that one thing falls, your whole portfolio feels it. It can also hide in holdings that look different but move together.
- Category
- Risk Management
- Reading time
- 3 min
- Also called
- Single-stock risk, Overconcentration
- Updated
Concentration risk in plain words
Concentration risk is the chance of outsized losses when a big share of your portfolio sits in one investment, asset class or corner of the market.1
Holdings from the same industry, region or type of security tend to move together, so one bad event can hit them all at once.1
Before adding to a position, check that it won't leave you overexposed to one company or sector.2
How to check for it
List your biggest holdings
Find any single holding that makes up a large slice of the portfolio.1
Check for winners that grew
Watch for winners that have quietly grown much bigger than everything else.1
Look for hidden links
Group holdings by industry, region and security type — those tend to rise and fall together.1
Look inside funds
Look inside your funds too; owning only funds does not rule out concentration.1
Diversify
Spread money across asset classes and within each one.1
Check before adding
Before buying more, check the new total exposure to that stock or sector.2
Worked examples
Example 1 — One stock dominates
−24%A hypothetical portfolio of 100 has 60 in one stock, which falls 40%.
| Loss | 60 × 40% = 24 |
With so much in one stock, its fall did outsized damage to the whole portfolio.1
Example 2 — Hidden sector bet
−20%A hypothetical trader holds five different bank stocks; banking falls 20%.
| Loss | 100 × 20% = 20 |
Investments within the same industry tend to be highly correlated, so five stocks acted like one.1
Example 3 — Spread out
−4%A hypothetical portfolio holds 10 in each of 10 unrelated assets; one falls 40%.
| Loss | 10 × 40% = 4 |
Diversifying across and within the major asset classes kept the hit small.1
Concentrated vs diversified
| Aspect | Concentrated | Diversified |
|---|---|---|
| Holdings | Few | Many |
| One bad event | Big hit | Small hit |
| Upside | Larger if right | Smoother |
| Correlation | Often high | Lower |
Where it matters
Allocation
Setting Portfolio Allocation limits.
Diversifying
Applying Diversification.
Correlation
Checking Correlation between holdings.
Rebalancing
Using Rebalancing to trim winners.
Advantages and disadvantages
Advantages
- Checking it reveals hidden bets.
- Limits damage from one event.
- Easy rules like a cap per holding.
Disadvantages
- Concentration can creep in unnoticed.
- Funds can still overlap.
- Correlations change.
- Diversifying can dilute gains.
Going deeper
Read as far as you need. Each level builds on the one before it.
Common mistakes
Letting a winner grow unchecked
Rebalance.
Owning many similar stocks
Check sectors.
Assuming funds are diversified
Look at what they hold.
Adding to the biggest holding
Check exposure first.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Concentration risk is too much in one thing.
- It amplifies losses.
- It can hide in correlated holdings.
- Funds don't automatically fix it.
- Diversify and rebalance.
Frequently asked questions
How much is too much?
Do ETFs remove it?
Can winners cause it?
Further learning
- Diversification
Spreading risk.
- Correlation
Hidden links.
- Rebalancing
Trimming big winners.
- Portfolio Allocation
Setting limits.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- FINRA. Concentrate on Concentration Risk (opens in a new tab) Checked .
- CMC Markets. Averaging down stocks: Strategy, examples and when to use it (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.