Find out if your portfolio runs concentration risk
Investments
Posted by MoneyController on 27.09.2024
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Investing in a single asset or a set of assets that are particularly correlated with each other exposes investors to a specific risk: concentration risk.
Concentration risk is a typical risk in the financial sphere that concerns any type of investor: if an investor invests his capital in a single asset or in a group of assets that are closely correlated with each other, the risk he runs is that of exposing his capital to the performance of a single asset or a group of assets; in this case, the risk is proportional to the exposure to the asset (or to the group of assets) and to their riskiness.
Concentration is therefore risked if one invests in a single share, but also, to give another example, in a series of properties of the same nature (residential, for example), and concentrated in the same territory; the concentration, therefore, as one reads on the page of the US National Credit Union Administration, can also concern an asset class, as well as a productive sector, or a country (more generally, the risk is of a concentration at a regional level).
To avoid concentrating one's capital in a single asset, or in a single asset class, or in the same country or production sector, one needs a diversification strategy. As Christian Tavasci, Investment Expert at the Swiss consultancy VZ VermögensZentrum, writes, concentration risk can be avoided by careful portfolio diversification. In other words, this risk can be avoided by spreading risks across assets that are poorly or loosely correlated.
It should not be forgotten that there is no optimal level of risk in absolute terms: each investor has his or her own personal level of risk, which must be put in relation to his or her investment objectives (including timing). But adjusting one's investments to these parameters, including risk, is an operation that can also prove very complex. That is why one solution is often to consult a financial advisor.
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Why does it make sense to diversify your investment portfolio?
From the glossary: