Concentrated Stock Positions: High Rewards, Higher Risks – What to Know Before Betting Big on One Stock

by Jenna Snittjer of Russell Investments, 2/7/25

Executive summary:

  • Many investors believe that holding “the next big thing” is the route to outsized gains in the stock market
  • But the risks may be high, and knowing when to divest is key as market leadership does tend to change – sometimes suddenly
  • Help your clients avoid “single-stock risk” through diversification.

The recent dominance of the “Magnificent 7” technology names may help fuel the common belief that a single stock portfolio is the best way to deliver extraordinary returns. But looking back over a longer-term horizon, a concentrated stock portfolio has often led to greater volatility and potential losses. While holding a big chunk of a portfolio in one specific name can offer the potential for outsized gains, it can also expose investors to significant risks.

Active investing vs. overconcentration

A concentrated stock position is generally defined as holding more than 10% of a portfolio in a single stock. Having a large position in a single stock might seem a good way to achieve benchmark-beating returns, but is it the best approach to active investing? At its core, active investing intentionally deviates from an index with the goal of outperforming it. This approach involves deliberate positioning decisions, ongoing portfolio monitoring, and adjusting strategies based on market conditions and expectations of what areas of the market might perform well in the future. By contrast, many people with concentrated stock positions arrive there passively: through an inheritance, employee stock options or stock purchase plans, or simply because the stock’s value grew significantly over time.

Professional active investors, such as fund managers, may bet heavily on specific stocks or sectors, but still attempt to diversify across other investments and actively manage risk. In contrast, an individual investor with a concentrated stock position often relies on hope that the individual name will continue to be a winner. There can be an emotional element as well: if the stock was inherited or is related to the company where they are a long-time employee, or was purchased many years prior, the investor may be reluctant to divest. This increases “single-stock risk,” meaning that investor’s financial future becomes tied to the performance of just one company.

The dangers of over-concentration are well-documented, and there could be additional industry-specific risk if the stock is related to the investor’s employment. In a worst-case scenario an employee could lose their income stream at the same time as the stock they received as part of their compensation is dropping in the market. Intel is a recent example with mass layoffs occurring while the stock price dropped. Enron employees experienced something similar in the early 2000s, losing both their jobs and life savings because they held significant portions of their portfolios in company stock.