The dangers of single stock concentration

Single stock concentration risks have been shown up by the recent selloff in a number of large-cap US software names. Here we outline the key risks from over-concentration in single stocks and ways to potentially remedy this through diversification.

• Company-specific risk
  One earnings miss, scandal, regulation change or product failure can materially damage the entire portfolio.

• Volatility amplification
  Individual stocks typically move far more than diversified portfolios — both up and down.

• Permanent capital loss risk
  Companies can fail. Diversified markets recover; individual firms often don’t.

• Behavioural bias
  Investors become emotionally attached and hold losers too long or double down.

• Narrative dependence
  Investment thesis tied to one story (AI, EVs, biotech etc.). If sentiment shifts, exposure collapses.

• Timing risk
  Buying a single stock at peak hype or valuation can lead to long recovery periods.

• Liquidity shock
  Negative news can trigger sharp, gap-down moves with no exit opportunity at expected prices.

• Sector correlation
  Even if it feels like “one great company”, it may still be heavily tied to one sector cycle.

• Currency exposure concentration
  Single US or overseas stocks introduce unhedged FX risk.

• Missed global growth
  Capital locked in one firm means missing performance from other regions, sectors and asset classes.

• Drawdown severity
  Concentrated portfolios typically suffer deeper losses in market stress periods.

• Income instability
  Dividend cuts from one company can eliminate portfolio income.

• Valuation risk
  Popular stocks often trade at stretched multiples; when expectations reset, declines can be sharp.

• Regulatory / political exposure
  Policy changes (tax, antitrust, tariffs) can disproportionately impact individual companies.

• Career / reputation risk (for self-directed investors)
  Large losses from a single bet often lead to disengagement from investing entirely.

Recently I looked at why investors should embrace ETFs as a means of improving diversification. 

Some of the most popular ETFs bought by Saxo clients over the last three months include the Vanguard FTSE All-World UCITS ETF (VWRL), which provide global exposure to equities and natural sector and geographic diversification. The iShares Core MSCI World UCITS ETF(IWDA) has also been popular. Both have proved resilient amid the market turmoil in specific sectors.

Another is the Vanguard S&P 500 Dist UCITS ETF (VUSA), which seeks to track the performance of the S&P 500 index, a widely recognised benchmark of US stock market performance. Alternatives to this include the Xtrackers S&P 500 UCITS ETF (XDPG).

Another popular index tracker is the Vanguard FTSE 100 UCITS ETF (VUKE) - which tracks the performance of the FTSE 100.

Among Sectoral ETFs, the rise in gold prices has attracted interest in the VanEck Gold Miners UCITS ETF (GDGB), which tracks the price and yield performance of the NYSE Arca Gold Miners Index. A similar fund is BlackRock’s iShares Gold Producers UCITS ETF (IAUP), also popular, which reflects the return of the S&P Commodity Producers Gold Index.