Portfolio Concentration Risk: Why "Diversified" Often Isn't
"I own 15 different stocks, so I'm diversified." It's one of the most common — and most misleading — things investors tell themselves. Counting positions is not the same as measuring risk, and the gap between the two can be bigger than people expect.
Diversification isn't about how many things you own — it's about how much you'd lose if one of them went to zero
Imagine two portfolios, both with 15 positions. In the first, every position is roughly the same size — about 6.7% of the portfolio each. In the second, one stock makes up 60% of the total, and the other 14 positions split the remaining 40%.
Both portfolios can technically claim "15 holdings." Only one of them is actually diversified. If that dominant position in the second portfolio drops 50%, the whole portfolio takes a serious hit — the other 14 positions barely matter at that point.
A real way to measure it: the Herfindahl-Hirschman Index (HHI)
This isn't a made-up metric for retail investors — it's the same concentration measure regulators and antitrust economists use to evaluate market concentration, adapted to a portfolio. The math is simple: take each position's weight as a share of your total portfolio, square it, and add them up.
The result lands on a scale where, roughly:
- Below 1,500: well diversified
- 1,500–2,500: moderate concentration
- Above 2,500: high concentration
Because the weights are squared, a single large position contributes disproportionately more to the score than several small ones — which is exactly the point. A 40% position hurts your score far more than four separate 10% positions, even though the raw dollar amount is the same. That's the math correctly capturing that concentrated bets carry more risk than the same money split up.
Concentration risk hides in places people don't expect
It's easy to watch for concentration in a single stock. It's much easier to miss when it happens indirectly — for example, if you hold a "diversified" tech ETF and individual shares of a few of the same mega-cap tech companies the ETF already holds heavily. On paper you have two different tickers. In practice, your actual exposure to any one company can be much higher than either position alone suggests.
What to actually do with this
You don't need to force every position to an identical size — that's not realistic, and high-conviction ideas deserve to be sized differently than speculative ones. The point isn't to eliminate concentration entirely; it's to know it's there on purpose, rather than discovering it by accident when one position moves against you.