What is a Concentrated Position?

A concentrated, or single stock, position occurs when an investor owns shares of a stock that represents a large percentage of their overall portfolio. Usually, a stock that comprises more than 10% of a portfolio is considered an “overweight” or concentrated position and should be carefully reviewed to maintain diversification. Similarly, a portfolio that holds a small number of different securities that does not provide adequate diversification is considered a concentrated portfolio.

If you’ve heard the phrase “don’t put all your eggs in one basket,” here’s why: According to a study conducted by J.P. Morgan, about 40% of all Russell 3000 companies have lost at least 70% of their value — permanently — down from their peak since 1980.

For technology and biotech companies, that number is even worse.

It was not just small, unheard-of businesses that fell victim to market forces. Large and well-known companies suffered serious declines, and many others disappeared entirely: Borders, Compaq, Enron, General Foods, MCI, RCA and TWA, to name a few.

Jemma Everyday Wisdom: To maintain prudent diversification and potentially improve your returns and reduce your risk in your overall portfolio, avoid having concentrated positions in any one stock or small group of stocks.