How concentrated is too concentrated?

There is no threshold at which a portfolio becomes officially too concentrated. What exists instead is arithmetic: a set of measures that describe how much of your outcome rests on how few decisions, and which are worth knowing because concentration is usually accidental rather than chosen.

Concentration accumulates without a decision

Nobody sets out to put a third of their money in one company. It happens because the position that grew fastest ends up occupying the most room, which means the holdings dominating your portfolio today are the ones that already worked.

The same arithmetic applies to sectors and countries. A portfolio assembled one purchase at a time from headlines and familiarity tends to drift toward whatever has been rising, and the drift is invisible until something is measured.

The measures worth knowing

Largest position weight

The share of your portfolio value in your single biggest holding. The crudest measure and the one most people can estimate for themselves, but it answers only one question: how much rests on one company.

Top five weight

The combined share of your five largest positions. More informative than the largest alone, because a portfolio can look reasonable at the top and still have five holdings accounting for most of it. A long tail of small positions can disguise this: forty holdings sounds diversified, and if thirty-five of them are one percent each, thirty-five of them together matter less than the largest one.

The Herfindahl index

Square each holding’s weight as a decimal, then add them up. The result runs from near zero to one, and its useful property is the squaring, which makes large positions count disproportionately.

The reciprocal of that number is the more intuitive form: 0.05 inverts to 20, meaning the portfolio behaves roughly like twenty equally weighted positions. The second example inverts to about 3.6, so despite holding eleven things it behaves closer to three or four. That gap between how many holdings you own and how many you effectively own is the whole point of the measure.

Weights by name are not the only weights

A portfolio can hold thirty different companies and still rest on one outcome. The common routes to that are worth naming, because each is invisible in a list of position sizes:

• One sector across many names. Ten technology companies are ten holdings and one bet on the same conditions.
• One country. A portfolio spread across industries but concentrated in a single market carries that market’s currency and policy with it.
• Funds that overlap. Two broad index funds can hold many of the same large companies, so owning both raises the weight of those companies rather than spreading it.
• Your own income. Shares in the company you work for concentrate your salary and your savings on the same employer.

Why the answer is not a number

Concentration determines how wide the range of outcomes is, in both directions. Concentrated portfolios produced most of the best long-run results anyone can point to, and most of the worst ones, and that is one fact rather than two.

What a measure gives you is the size of the position you are actually taking, stated plainly, so that it is a position you chose rather than one that assembled itself. Whether that size suits you depends on your horizon, your income, what else you own and how you would react to a long decline, none of which appears in a portfolio file.

How to see yours

Whatever you use, the figures to look for are the largest position weight, the top five weight, and the split by sector and by country. The useful habit is checking them after markets have moved rather than only when buying something, because drift is the mechanism and drift happens while you do nothing.

In HaboFi these live on the sector and country breakdown, computed from the transaction history you imported rather than from anything you enter by hand.