Mitigating Concentration Risk in Large Portfolios

For high-net-worth investors, portfolio concentration—owning a significant portion of wealth in one or a few positions—can be a silent risk that erodes wealth during market downturns. Precision investment planning requires addressing concentration risk head-on to safeguard long-term growth and stability.

Ron McCoy emphasizes that true financial strength comes from strategic diversification and proactive risk mitigation, not just riding on a handful of winners.

What Is Concentration Risk?

Concentration risk arises when a portfolio’s performance becomes overly dependent on one asset, sector, or market. While large positions can generate significant gains, they expose investors to outsized losses if that asset falters.

Source: FINRA – Understanding Investment Risk

Why It Matters

Studies have shown that portfolios with more than 25% exposure to a single asset are at elevated risk of volatility and drawdowns. Morningstar data suggests that diversified portfolios outperform concentrated ones over a full market cycle, with lower volatility and greater risk-adjusted returns.

Case Study: The Tech Bubble Bust

A 2001 tech entrepreneur held 80% of his net worth in a single high-flying NASDAQ stock. When the dot-com bubble burst, the stock plummeted 85%, slashing his net worth from $10M to under $2M in a year. Diversification across sectors could have preserved much of his capital.

Core Strategies to Mitigate Concentration Risk

Ron McCoy’s precision planning leverages the following approaches:

1. Strategic Diversification

Spread holdings across sectors, asset classes, and geographies to avoid single-point failures. Aim for no more than 15% exposure to any one asset.

2. Hedging with Options

Use protective puts or collars to limit downside risk on large single-stock positions while retaining some upside potential.

3. Gradual Rebalancing

Implement a tax-efficient divestment plan, selling down concentrated positions over time to minimize tax impact and redeploy capital into diversified holdings.

Actionable Tips for Investors

• Run Regular Stress Tests: Use tools like Morningstar’s Portfolio X-Ray to identify hidden concentration risks.
  
  
• Tax-Aware Diversification: Coordinate with your advisor to time sales around capital gains tax thresholds.
  
  
• Stay Vigilant: Reassess portfolio exposure annually, especially after major market moves or windfalls.

Ron McCoy’s Expert Perspective

Ron’s wealth management philosophy is rooted in proactive defense and strategic offense. His hands-on approach ensures clients don’t just chase returns—they protect and preserve their wealth across cycles.