It's natural to let a top-performing stock be the star of your investment portfolio. Maybe it's an issue you passionately believe in, or one that has provided outstanding returns in recent history. But when a single stock starts to overshadow the rest of your holdings, your financial future could become precipitously vulnerable. This is the old trap of concentration risk—and it can quietly destroy years of diligent investing.
How a single stock can take over your portfolio
Concentration risk tends to sneak up on you over time. A stock you purchased years ago consistently outperforms the market, and because you never rebalance, it accumulates to represent a disproportionately large percentage of your overall portfolio. It may appear to be a great problem to have—but when one stock represents 40%, 50%, or more of your holdings, your investment fortune is tied to the success of a single firm.
This isn't merely a theoretical threat. Many technology investors witnessed this occur with shares such as Meta or Tesla. Early successes became big, unrealized profits, and the desire to catch the momentum outpaced the restraint to rebalance. When the market shifted—or the firm missed earnings—losses accreted rapidly.
The downside of overexposure
A portfolio that is over-concentrated in one stock has several threats. Whatever troubles the company, whether regulatory, leadership turnover, product failure, or reputation hit, can pull the stock down with your portfolio. Even when the overall market is up, a bad quarter or strategic mistake from your leading stock can erase gains or cause a panic sell.
In addition, emotional attachment tends to obscure judgment. Investors might be reluctant to sell a long-performing winner because they are afraid of taxes, loyal, or optimistic about the company's future. However, this emotional bias can create lost opportunities and unnecessary losses.
Why diversification still matters
The very essence of diversification is straightforward: don't put all your eggs in one basket. A diversified portfolio disperses risk across geographies, sectors, and asset classes. Thus, a down period in one sector is balanced by stability or gains in another.
Diversification is not about staying out of high-performing stocks—it's about limiting how much weight they have in your portfolio to lower overall volatility. Your financial advisor will usually recommend keeping any one stock at no greater than 10% of your entire investment portfolio. That way, even if a hot stock falters, your overall well-being isn't affected.
When and how to rebalance
If one stock has increased to overwhelm your portfolio, trim your position over time. You can sell in increments to control tax effects or roll gains into other diversified investments such as index funds or fixed income. Others employ a "core and satellite" approach—maintaining a small amount in high-conviction stocks and keeping the majority in broad-based investments.
Rebalancing once or twice a year is most likely to work for the majority of retail investors. In doing this, check the weightage of every asset, consider if it suits your risk tolerance and objectives, and make the necessary changes.
While it may be exciting to watch one stock outperform, it’s risky to let it define your entire portfolio. Markets are unpredictable, and even the best-performing companies can face setbacks. Protecting your wealth means ensuring no single stock—no matter how promising—has the power to sink your financial future.
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