Building a portfolio
Concentration risk
The risk that too much of your outcome depends on one holding, sector, country or currency.
How it works
Concentration is not automatically a mistake — most large fortunes were built by it — but it must be deliberate. The dangerous version is the concentration that assembled itself while you were not measuring.
It has several dimensions, and they hide each other. A portfolio can look diversified by name and be concentrated by sector, or diversified by sector and concentrated in one currency.
Where it misleads people
People check concentration by counting holdings. The number that matters is the weight of the largest few and what they have in common, not how many rows the table has.
Worked example
Eight holdings, none above 15% by name, can still be 70% technology and 100% US dollar. Two of those three views look fine.
Related terms
- DiversificationSpreading money across things that do not move together, so no single failure can decide your outcome.
- WeightHow much of your portfolio one holding represents, as a percentage of the total value.
- Effective number of holdingsHow many equally weighted holdings your portfolio behaves like, given how uneven the real weights are.
- CorrelationA measure from −1 to +1 of how closely two investments move together.
- Currency riskThe risk that exchange-rate moves change your return on a foreign holding.
Mentioned in
More in Building a portfolio
- Asset allocation
- Tactical asset allocation
- Covariance
- Strategic asset allocation
- Drift
- Sequence-of-returns risk
- Safe withdrawal rate
- Efficient frontier
All 20 Building a portfolio terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.