We've spent six posts on ratios and formulas — Sharpe, Sortino, Calmar, volatility, alpha, beta. This last one in the series is different. There's no formula to memorise here, just a question worth asking honestly about your own portfolio: if your biggest few holdings had a genuinely bad week, how much of your portfolio would go down with them?
That's what concentration measures, and it's arguably the most intuitive risk number on the whole dashboard — precisely because it doesn't need any statistics background to understand.
What it actually measures
Concentration is simply the share of your total portfolio value held in your largest positions. "Top 5 holdings: 31.3%" means your five biggest positions, combined, make up just under a third of everything you own. "Top 10 holdings: 49.2%" means your ten biggest positions make up just under half.
There's no formula to work through here — it's a straightforward sum of position weights, ranked largest to smallest. The number is exactly what it says it is.
Why it matters more than people expect
Diversification — spreading your money across many different holdings — is one of the few genuinely free lunches in investing. It doesn't require picking better stocks or predicting the market correctly. It simply means that if any single company has a terrible year (a scandal, a failed product, a regulatory problem, a plain old bad quarter), it can only take down a limited slice of your total wealth, rather than a large chunk of it.
High concentration flips that equation. If your top 5 holdings make up 60% of your portfolio, a genuinely bad outcome for even one of those five companies can meaningfully dent your entire net worth in a way that no ratio, however good, will have warned you about — because Sharpe, Sortino, Calmar, alpha, and beta all describe how your portfolio has behaved historically. None of them directly capture the risk of "what if one specific company blows up."
How to read the numbers
There's no universally "correct" concentration level — it genuinely depends on what you're trying to do:
- A broad index fund might have a Top 10 holdings figure well under 30%, spread across hundreds of companies. Very low single-stock risk, but also no chance of any one great pick meaningfully moving the needle.
- A high-conviction, actively-managed portfolio — the kind built around genuine research and strong opinions on a handful of businesses — will naturally run higher, often 40-60%+ in the Top 10. That's not automatically a mistake; it's the deliberate trade-off of conviction investing. You're accepting more single-stock risk in exchange for a real chance at outperformance if your picks are right.
- Very high concentration (a small number of stocks making up the vast majority of the portfolio) is where the conversation shifts from "a deliberate strategy" to "a genuine risk that deserves an honest look" — particularly if the concentration wasn't a deliberate choice, but simply the result of one or two positions growing much faster than everything else around them (a very common, easy-to-miss way portfolios drift into high concentration without anyone intending it).
The trade-off, stated plainly
Every ratio in this series has been, in one way or another, about the relationship between risk and return. Concentration is no different — it's just the most direct version of that trade-off. More concentration means more exposure to single-company risk, but it's also the only real path to significantly outperforming a broad index, since spreading across hundreds of holdings mathematically guarantees your results will land close to the average.
There's no universally right answer to how concentrated a portfolio "should" be — but there is a wrong way to arrive at your number: by accident, without ever having looked at it. That's exactly what this figure on your dashboard is for — not to tell you concentration is good or bad, but to make sure the level you're sitting at is one you actually chose, not one you drifted into.
That's the last post in this series on the risk numbers behind your portfolio — from Sharpe all the way through to concentration. Taken together, these seven numbers don't replace your own judgement about a portfolio, but they do make sure that judgement is working from a genuinely complete picture, not just the headline return.