Concentration vs. Diversification
The case for owning a few investments you know well, the case for owning many, and what research on the long-run returns of individual US stocks says about the odds.
The short version
A concentrated portfolio puts large amounts into a few holdings. If they do well, it can beat the market by a wide margin. If they don't, it can fall far behind. Research covering US stocks since 1926 found that most individual stocks did worse than Treasury bills over their lifetimes, and that the best 4% of companies accounted for all of the stock market's net gain. That makes concentration a bet on finding those few. Diversification makes sure you own them.
By the end of this lesson, you'll be able to
- Describe what concentration can achieve and what it risks
- Explain the research finding on how few stocks drive long-run market gains
- Recognize hidden concentration, such as owning your employer's stock
Why this matters
Some famous investors have built their records on a handful of big bets, and there's a well-known argument that diversification is just protection against not knowing what you're doing. It's worth taking that argument seriously, and then looking at what the evidence says happens to most people who concentrate.
The case for concentration
A Concentration risk. The risk that comes from having a large share of a portfolio in one investment, company, industry, or country. Glossary portfolio puts a large share of its money into a few holdings. The reasoning goes like this:
- Your best idea is, by definition, better than your fiftieth. Spreading money across fifty ideas waters down the best ones.
- You can genuinely understand five businesses. Fifty is much harder, and the research skills from Part 4 take real time per company.
- To end up very different from the market, you have to own something very different from the market.
All three points are true. The catch is in the third: being very different from the market works in both directions.
The rest of this lesson is for members
Still to come in this lesson: What the research says, Hidden concentration, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Position SizingPart 5: Building a Portfolio
- When One Position Gets Too BigPart 5: Building a Portfolio
- Passive vs. Active InvestingPart 6: Strategy, Behavior, Accounts, and Taxes
Notes and sources
- Hendrik Bessembinder, Journal of Financial Economics 129(3), 440-457. Do Stocks Outperform Treasury Bills? (2018). Checked 2026-10-05.