Money guide · Investing basics, fees, and risk
Portfolio diversification: reduce concentration risk
Understand diversification across assets and holdings, overlapping funds, and the risks it cannot eliminate.
How it works
Asset allocation is the broad mix of categories; diversification also concerns the holdings within those categories. Several funds may own the same securities, creating overlap. A fund focused on one sector can still be concentrated even with many holdings. Examine economic exposure, not just the number of account positions.
A worked example
Suppose 50% of a $20,000 portfolio is in one company. If that position falls 40% and all other holdings are unchanged, the portfolio falls $4,000, or 20%. If the position is only 5%, the same isolated decline costs $400, or 2%. This simplified example illustrates concentration; in real markets other holdings may also fall.
What to compare
Review asset classes, sectors, issuers, geography, and overlapping holdings. Include employer stock and other investments outside the account you are examining. Rebalancing can restore a chosen mix but may involve taxes or transaction costs. Choose a review process connected to your goals and life circumstances rather than reacting to every market headline.
A common mistake to avoid
Owning many tickers does not automatically mean meaningful diversification. Several funds tracking similar indexes may largely duplicate one another. Nor should diversification be described as insurance against market-wide declines. Keep accessible reserves for near-term obligations and treat allocation as a decision about risk and goals.
Can a diversified portfolio still lose money?
Yes. Multiple assets can fall together. Diversification addresses concentration and some types of risk; it does not guarantee a positive return.
Sources and further reading
Connect this to inflation
Inflation changes the spending power of money over time. Read the related inflation explainer, or explore historical market returns using your own assumptions.