Why is holding too much of my portfolio in a single stock risky?
Holding a significant amount of a portfolio in one or more individual stocks subjects the portfolio to the unique risks of that company. Sudden events such as the revelation of faulty products (Volkswagen), large-scale accidents (BP), or market dynamics like platform shifts and growth challenges (Groupon) can lead to sharp declines in individual stock prices, even in an otherwise rising market.
Modern Portfolio Theory, and specifically the Capital Asset Pricing Model (CAPM), asserts that this concentrated allocation is an uncompensated risk (i.e., it does not result in a higher expected return) and is therefore unnecessary. Research shows investors can minimize the company-specific risk of individual stocks by investing in 50 or more different issuers, provided the portfolio is not concentrated in any one of these stocks and each holding is relatively uncorrelated.
This communication has been prepared solely for informational purposes only. Nothing in this communication should be construed as an offer, recommendation, or solicitation to buy or sell any security or a financial product. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.
Wealthfront offers a free software-based financial advice engine that delivers automated financial planning tools to help users achieve better outcomes. Investment management and advisory services are provided by Wealthfront Advisers LLC, an SEC registered investment adviser, and brokerage related products are provided by Wealthfront Brokerage LLC, a member of FINRA/SIPC.
Wealthfront, Wealthfront Advisers and Wealthfront Brokerage are wholly owned subsidiaries of Wealthfront Corporation.
© 2020 Wealthfront Corporation. All rights reserved.
Comments are moderated prior to publication
Still need help?
Our support team has your back.Contact us