concentration risk
The risk of loss from having too large a portion of a portfolio invested in a single asset, sector, or geographic region.
Example
“An employee with 80% of their net worth in company stock faces severe concentration risk if the company struggles.”
Memory Tip
CONCENTRATION risk = too many eggs in one basket. Diversification reduces it.
Why It Matters
Concentration risk directly affects your financial security and wealth growth. If most of your money is tied up in one investment and that investment performs poorly, you could lose a significant portion of your savings, making diversification essential for long-term financial stability.
Common Misconception
Many people believe that owning multiple investments automatically protects them from concentration risk. However, holding many stocks all in the same sector or geographic region still leaves you vulnerable, as they tend to move together during market downturns.
In Practice
Consider an investor who puts 60 percent of their portfolio into their employer's stock, 25 percent into their industry's sector funds, and only 15 percent into other investments. When that industry faces a downturn, they lose significant value across most of their holdings, whereas a diversified investor with positions spread across technology, healthcare, utilities, and real estate would absorb the shock more easily.
Etymology
CONCENTRATION (gathered into one area) RISK. The RISK from over-CONCENTRATION in one place.
Common Misspellings
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Related Terms
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See Also
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