Concentration Risk in Stock Holdings: A Portfolio’s Hidden Danger
By Matt Held, CFP®
Most investors (even novice ones) don’t intend to keep a lopsided portfolio. But whether due to inattention or complacency, some investors may find themselves running a concentration risk in stock holdings. That may leave them in an unexpectedly vulnerable spot.
What constitutes concentration risk in stock holdings? What steps can you take to avoid it? Let’s take a closer look.
What Is Single-Company Concentration?
Single-company concentration arises when a commanding percentage of a person’s stock portfolio is invested in one lone stock. For example, if a big chunk of your overall portfolio value is tied to Amazon, you run a concentration risk in stock holdings.
While there’s no legal definition, many analysts suggest that if 10% of your portfolio is tied to one commodity, then it’s at risk, especially if the rest of your portfolio is divided among just a few other companies.
What causes single-company concentration? The biggest culprit may simply be casual neglect. Many passive investors don’t shift their portfolio balances just because they don’t review their holdings that often.
Others may be heavily invested in the company they work for (or used to work for). They may have received non-cash equity compensation through RSUs, ESPPs, or stock options that weigh their portfolio. They may have inherited stocks from their families and haven’t divested. They may also just feel a sense of loyalty to blue-chip stocks that have a history of good returns.
Why Is Single-Company Concentration Risky?
What is the harm in putting all or most of your investment eggs in one basket?
Lack of Diversification
The most pressing risk in stock concentration is that it makes your portfolio less diverse. Financial advisors recommend diversification because it can mitigate portfolio risk. If one of the companies you invest in is going through a hard time financially, other companies that are doing well can offset your losses.
Company-Specific Risk
Even the mightiest of companies can tumble. Enron, Lehman Brothers, Silicon Valley Bank, and WorldCom were all huge, publicly traded companies that fell into ruin, whether due to scandal or self-inflicted wounds. Some former blue-chip companies that still exist (such as General Electric before the spin-off of GE Aerospace) have experienced great declines in value.
Emotional Attachment
Some investors may simply feel too loyal to a company, especially if they’ve worked for it. They may be reluctant to sell off their shares even if they’re strongly advised to do so.
How to Determine Your Concentration Risk in Stock Holdings
Again, finance professionals suggest that if one stock makes up 10% or more of your portfolio value, you may be at risk. Your online brokerage statement should indicate what percentage each commodity you hold takes up in value.
Some analysts use the Herfindahl-Hirschman Index (HHI) to measure market concentration, especially after a company acquires or merges with another. You can also review any mutual funds or ETFs you may hold that might result in duplicate appearances on your stock ledger.
Ways to Reduce Concentration Risk
Fortunately, correcting concentration risk in stock holdings is fairly straightforward. The most pragmatic way is to gradually sell off shares in the over-invested company and shift the proceeds to other investments. Especially if you earn a sizable profit, it’s easy to divide it into shares in multiple commodities.
More experienced investors may deploy tax-efficient strategies like tax-loss harvesting and charitable donations to diversify their holdings. Hedging tools like protective puts, high-net-worth exchange funds, and structured notes might also be used.
Curious about these advanced strategies, like collars, exchange funds, or charitable remainder trusts (CRTs)? Stay tuned for our upcoming article, where we’ll break down how each one works and when they might make sense.
Get Help With Adjusting Your Portfolio
A qualified financial advisor can work with you to lessen concentration risk in stock holdings. Clarity Wealth Management can help you attain a healthy balance. Many everyday investors contact us for help in adjusting their investment and retirement portfolios to fit with their overall financial goals.
Interested in a no-obligation, icebreaker call? Schedule online here, call (513) 278-9420, or email Info@ClarityWealth.org.
About Matt
Matt Held, CFP®, is the lead advisor and a founding partner of Clarity Wealth Management, a boutique firm based in Cincinnati, OH. Since entering the industry in 2006, Matt has helped corporate executives, professionals, and business owners uncover opportunities and build long-term financial strategies. Driven by a desire to control his own future and create a lasting brand, Matt co-founded Clarity Wealth Management in 2012. His mission was to build a firm that would provide truly personalized guidance—and become a legacy for his own family. Today, Clarity serves about 100 households and focuses on helping clients simplify and navigate complex financial decisions, particularly those involving equity compensation, tax planning, and executive retirement.
Matt’s approach is rooted in trust, loyalty, and hard work. As a CERTIFIED FINANCIAL PLANNER® professional, he is deeply committed to long-term relationships and believes that clarity doesn’t mean predicting the future, but having the confidence that your plan can handle whatever comes your way.
Outside of work, Matt enjoys time with his wife, Abby, and their twins, Henry and Kinsley. Whether it’s watching sports (they love their Ohio State Buckeyes), hitting the slopes out West, or squeezing in a workout, he’s passionate about staying active and present. He’s also a proud graduate of Moeller High School and The Ohio State University. Matt holds Series 7 and 66 licenses, is licensed for health insurance, and earned his CFP® certification in 2012. He has been named a Five Star Wealth Manager in the Cincinnati area since 2013.* To learn more about Matt, connect with him on LinkedIn.
*2013-2018 and 2020-2024 Five Star Wealth Manager Award, created by Five Star Professional. The 2024 award was presented in September 2024 based on data gathered within 12 months preceding the issue date. Advisors pay a fee to hold out marketing materials. Not indicative of advisor’s future performance. Your experience may vary. For more information, please visit www.fivestarprofessional.com.
