Mitigating Concentration Risk in Large Portfolios

For high-net-worth investors, having too much of your wealth in just one or a few investments can be a quiet risk that is easy to overlook. If the market goes down, this lack of diversification can hurt your portfolio more than you might expect. The best way to support long-term growth and stability is to recognize this risk and plan for it.

Ron McCoy points out that real financial strength comes from spreading your investments across a variety of opportunities and taking steps to manage risk. Relying on just a few winners is rarely a recipe for lasting success. Strategic diversification can help keep your wealth secure through different market conditions.

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: Work closely with your advisor to create a strategy that considers both your investment goals and potential tax implications. For specific tax-related questions or timing, we always recommend consulting with a qualified CPA.
  
  
• 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.