Concentration risk.

In plain English

Concentration risk is the exposure created when a small number of positions drive most of a portfolio's outcome, so a single event can move the whole balance. It appears in obvious forms, like one stock making up half a portfolio, and in quiet ones, like a fund holding many names that all depend on the same industry, customer, or interest rate. Company stock plans are a common source, because the same employer supplies both the paycheck and the investment. Index funds can concentrate too when a handful of large companies dominate the weighting. The response is spreading exposure across sources that do not share the same driver.

01Why it matters

A concentrated portfolio can lose years of progress on one company's bad news, and that specific risk is not one the market pays extra to carry.

02The math, step by step

A 300,000 portfolio holds 120,000 in an employer's stock, or 40 percent. The company misses badly and the stock falls 50 percent, costing 60,000, a 20 percent hit to the whole portfolio. Held at 5 percent instead, the same event costs 7,500, or 2.5 percent.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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