Concentration Risk | Arrow Insights | Ep 23
A successful investment can create an unexpected problem: too much of your wealth may end up depending on one asset.
That is concentration risk. It can happen when a single shareholding grows substantially, employee equity builds up over time, or property becomes a dominant part of your overall financial position.
Concentration risk is not necessarily about making a poor investment decision. In many cases, it develops because an investment has performed well or because wealth has accumulated gradually in one place.
The risk is that one asset can begin to have a much greater impact on your portfolio, and your financial position, than you originally intended.
Key Takeaways
Single shares can become too influential.
A holding that starts as a modest part of a portfolio can grow significantly over time. If that company later underperforms, the impact on the broader portfolio can be substantial.Employee equity can create a double exposure.
Employees who accumulate shares in the company they work for may have both their investment wealth and employment income tied to the same business.Property can create liquidity and income risks.
Property can be an effective long-term wealth-building asset, but it can be difficult to sell or divide when capital is needed. Investors may also become heavily dependent on rental income from a single property or tenant.
Watch the full video to learn how to recognise concentration risk in your own financial position and the questions worth considering before circumstances change.
General Advice Warning:
Any general advice on this page does not take account of your personal objectives, financial situation and needs, and because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. Information contained on this page was correct at the time of posting.
