By Indexopedia Research Team | July 11, 2024 | In
Stocks are considered risk assets. Every stock can either move up in value, or down in value. Losing value is considered downside risk, and it is this risk that is of most concern to investors. In the 1950’s Harry Markowitz, the father of Modern Portfolio Theory, figured out that the overall risk of a portfolio could be meaningfully reduced by simply spreading a stock’s individual risk by owning a portfolio of several stocks. Concentrated portfolios, those dominated by a small number of names, often arrive at this point due to rapid price appreciation. So, while concentration presents a real and measurable risk, many investors are reluctant to recognize it, let alone do something about it. They may view their brokerage statements and be enamored by the results. The problem is that a stock which experienced a rapid 20% rise in price may also experience a 20% decline. Investors have short memories, and even large market “corrections” are often quickly forgotten, replaced with the euphoria of watching a few high-flyers soar increasingly higher. It can be intoxicating. But it also represents a significant risk. So just