Concentration is a Killer
Most investors understand that markets can be volatile. What many underestimate is the danger of having concentrated positions in investments in their portfolio. Concentration magnifies every good and bad surprise, and when some people incorporate leverage, it turns ordinary market swings into life‑changing outcomes.
Why Familiarity Isn’t Safety
It’s easy to trust investments you know well. Familiarity often feels like a margin of safety – yet the opposite is true. Sometimes, decision-makers delay trimming investment positions because they fear capital gains tax or believe prices will rebound.
In practice, severe losses in investments often strike without warning – think regulatory shocks, leadership shake-ups, fraud allegations, product recalls, or geopolitical events.
These are not just headlines (they can permanently erase wealth).
What the Data Tells Us
Academic evidence paints a sobering picture:
- Lifetime performance – A 2018 study by Hendrik Bessembinder examined every U.S. listed security from 1926 to 2016 and found that more than half lost money over their lifespan, while just 4 % of issuers accounted for the entire net gain of the market.¹
- Permanent drawdowns – J.P. Morgan’s 2020 review of roughly 3,000 U.S. names showed nearly half experienced a 70 %‑plus decline from which they never recovered.²
Direct quotes from that research drive the point home:
“When stated in terms of wealth creation, the best‑performing 4 % of listed companies explain the net gain for the entire U.S. stock market since 1926.” — Bessembinder (2018, p. 1576)
“Analyst recommendations have historically provided little protection against catastrophic declines.” — J.P. Morgan, Guide to the Markets (2020)
Deferring Tax Doesn’t Eliminate Risk
A common reason investors hold on to investments that have grown too long is to avoid triggering tax in a non‑registered account. Yet a 30–40 % price drop can erase far more than the eventual tax bill. Paying tax upfront and reallocating to a broadly diversified solution (with lower fees) often leaves investors better off over time despite the one‑time cost.
Diversification Still Wins
More recent work by Michael Israelov (2022) simulated 25‑year holding periods and showed that portfolios with fewer than 100 securities faced materially wider outcome ranges.⁴ The conclusion: long‑term diversification (by using funds that hold hundreds of securities across sectors and regions) remains the most reliable defence against falling short of your financial goals.
Behavioural Traps That Keep Us Stuck
Human nature compounds the danger. Familiarity bias, illusion of control, the endowment effect, status‑quo bias, and the disposition effect all push investors to hold on longer than is rational – even professionals are not immune
Practical Ways to Reduce Exposure
Ask yourself: If I had cash today, would I still buy this investment? If not, consider a disciplined exit plan:
- Gradual selling – Reduce the position in the funds over months or years to manage tax and market impact.
- Donation in‑kind – Gift appreciated funds with large capital gains to charity for a full fair‑market‑value receipt and no capital‑gains tax.
- Offset within registered accounts – Use RRSP to counteract realized gains, or TFSA to keep the gains tax-free.
The optimal approach depends on your broader financial picture – but doing nothing by default is rarely optimal.
The Bottom Line
Successful investing is rarely about one bold bet. It is about building a diversified, low‑cost portfolio and letting markets work for you. Concentrated investment positions introduce extra risk without a commensurate increase in expected return. Broad diversification, patience, and a clear plan remain the foundations of long‑term success.
“Good outcomes are far more likely when you own many winners – not when you try to guess which single one will be the winner.”
Disclosures:
Important information about mutual funds is found in the Fund Facts document. Please read this carefully before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Unit values and investment returns will fluctuate.
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.
References:
- Bessembinder, H. (2018). Do Stocks Outperform Treasury Bills? Journal of Financial Economics, 129(3), 440‑457. https://doi.org/10.1016/j.jfineco.2018.06.004
- J.P. Morgan Asset Management. (2020). Guide to the Markets – U.S. Edition.
- Barberis, N. et al. (2023). The Underperformance of Concentrated Stock Positions. SSRN Electronic Journal.
- Israelov, R. (2022). Diversifying Diversification. The Journal of Portfolio Management, 48(4), 33‑41.
Stick to a plan. Stay diversified. Keep costs low. Avoid the noise.
And remember: boring investing is often the most effective.
