Concentration risk
Also called: concentrated portfolio, position limit
The risk that a large share of a portfolio in one holding, sector or theme causes a large loss if that one thing goes wrong.
Concentration can be chosen, by putting the most money in a favourite idea, or can grow, as a winning holding rises to dominate the portfolio. Maximum position limits and trimming large winners cap the damage any single mistake can do.
Example
A holding that is 40% of a portfolio and falls 60% cuts the whole portfolio by 24%.
Learn more in these lessons
- Position sizing and concentrationHow much of your portfolio should you put in any one investment?
- Investment mistakes and lessons from historyWhat mistakes keep repeating in market history, and how can you avoid them?
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