Mitigating Concentration Risk in Large Portfolios

For high-net-worth investors, holding too much of your wealth in one investment can quietly put your entire portfolio at risk. If markets turn against that single asset, losses can be much larger than expected. The best way to support steady long-term growth is to recognize and manage this risk through smart diversification.

Building true financial strength means spreading investments across a variety of opportunities, rather than relying on just a few winners. Diversification helps keep your wealth secure—no matter how the market moves.

What Is Concentration Risk?

Concentration risk occurs when your portfolio’s performance depends too much on one asset, sector, or market. While a concentrated bet can produce outsized gains, it also exposes you to heavy losses if that investment stumbles.

Source: FINRA – Understanding Investment Risk

Why It Matters

Portfolios with more than 25% in a single holding are at higher risk for volatility and drawdowns. Morningstar data shows that diversified portfolios usually outperform concentrated ones over time, with lower risk and steadier returns.

Case Study: The Tech Bubble Bust

In 2001, a tech entrepreneur kept 80% of his wealth in one NASDAQ stock. When the dot-com bubble burst, that stock lost 85% of its value—cutting his net worth from $10 million to under $2 million in one year. Diversification could have preserved much of his capital.

Core Strategies to Mitigate Concentration Risk

• Diversify strategically: Spread holdings across sectors, asset classes, and regions. Try to keep any single position under 15% of your total portfolio.
• Hedge with options: Consider protective puts or collars to reduce downside risk on large single-stock holdings while retaining upside potential.
• Rebalance gradually: Create a plan to sell down concentrated positions over time—minimizing taxes and reallocating proceeds into diversified investments.

Actionable Tips for Investors

• Stress test your portfolio: Use tools like Morningstar Portfolio X-Ray to spot hidden concentration risk.
• Think about taxes: Work with your advisor on a diversification strategy that considers both your goals and tax impact. For specific tax timing and questions, consult a qualified CPA.
• Review exposure annually: Reevaluate portfolio risks every year—especially after big market moves or windfalls.

Expert Perspective

Strategic diversification is a foundation for building and preserving wealth. By keeping risk in check and updating your plan as your portfolio grows, you can help protect your assets—no matter what the markets bring.