What is concentration risk?

Concentration risk is the risk that comes from having a large part of a portfolio in a few positions — or in a single sector, country or currency. The more a portfolio depends on a small number of outcomes, the more one piece of bad news can hurt it. It is the opposite of diversification.

Concentration often builds up unnoticed. A stock that has risen strongly grows into a large share of the portfolio on its own, and funds that look different can hold the same companies.

How it is measured

Top weights. The share of the largest position, and of the largest five or ten together, is the most intuitive measure:

\text{Top-}k\text{ share} = \sum_{i=1}^{k} w_{(i)}

where $w_{(1)} \ge w_{(2)} \ge \dots$ are the weights sorted from largest to smallest.

Herfindahl–Hirschman index (HHI). The sum of the squared weights:

\text{HHI} = \sum_i w_i^2

It ranges from $\frac{1}{N}$ for $N$ equally weighted positions up to 1 for a single position. Its inverse is the effective number of positions.

A simple illustration

A portfolio worth €100,000 holds one stock worth €40,000 and six others worth €10,000 each:

\text{HHI} = 0.4^2 + 6 \times 0.1^2 = 0.22 \qquad N_{\text{eff}} = \frac{1}{0.22} \approx 4.5

The portfolio holds seven stocks but behaves like one with four or five equal positions. If the largest stock halves, the whole portfolio loses 20%, even if the six others do not move.

Where concentration hides

Company concentration through funds. A world equity ETF has around a quarter of its value in its ten largest companies. Holding the same companies again as individual shares adds to the same bets.
Sector concentration. Several technology stocks and a technology-heavy index fund are one bet, not several.
Country and currency concentration. A portfolio of global funds can still have most of its value in US companies and US dollars.
Employer shares. Shares of one's own employer combine investment risk with the risk to one's income.

How to read it

There is no single safe limit. Common rules of thumb cap a single stock at 5–10% of a portfolio, and a single sector at not much more than its share of the broad market. Concentration is not always a mistake — it is how large fortunes are made, and lost — but it should be a deliberate choice, made with an idea of what a bad outcome in the largest positions would cost.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

Is my portfolio concentrated in too few positions?

Quick concentration snapshot for your portfolio:

Measure	Figure
Number of holdings	16
Top 1 weight	13,95%
Top 5 weight	49,12%

What this means: portfolios with more than 20 holdings are often seen as broadly diversified; fewer than 20 can be considered concentrated. A top-1 share above 10% is commonly viewed as large, and a top-5 share above 30%–50% usually signals notable concentration. Compare those benchmark levels to the figures in the table to judge how concentrated your portfolio is.

See these numbers for your own portfolio

Floreo works out every figure on this page from your own holdings — returns, risk, allocation, currencies — and the assistant explains them the way this page does. Import from your broker, or try it on the sample portfolio first.

Start Demo

The demo opens straight away on a sample portfolio — no account needed.