Concentration risk (Klumpenrisiko)
Concentration risk is the danger of having a large share of your financial life exposed to one source of loss — a single employer, stock, sector, country, or currency. When that one source drops, everything tied to it drops together, instead of the loss being cushioned by unrelated positions.
Why it matters
Immigrants rebuilding finances in Germany often carry concentration risk without naming it: a Depot (brokerage account) weighted toward a former employer's stock, savings still parked in a home-country bank or currency, or a household income that depends on one employer for both salary and Betriebliche Altersvorsorge (occupational pension). Diversification — spreading exposure so no single failure wipes out the position — is the general remedy, but it only works once the concentration is visible; a portfolio that looks spread out on paper can still be concentrated by sector, country, or currency underneath.
The concept also applies outside a Depot: a paycheck is itself a concentrated bet on one employer and one industry, which is why human capital (the value of future earnings) and investment choices interact rather than sitting in separate boxes. Naming concentration risk is a starting point for evaluating job-related exposure, home-country bias in a portfolio, and currency exposure in savings — each a specific version of the same underlying pattern.
Worked examples
1. A single stock position. Someone holds €20,000 in one company's stock, received as part of an employee stock plan. If that company loses 40% of its value, the position loses 40% x €20,000 = €8,000 — the full weight of the decline lands on that one holding. Spread across an illustrative diversified fund of roughly 1,600 companies where no single company exceeds an illustrative 2% weight, the same 40% drop in that one company would cost at most 40% x 2% x €20,000 = €160 — a fraction of the concentrated loss, because the other 1,599 holdings are unaffected.
2. Comparing exposure across positions. The table below compares three ways to hold the same €20,000, using illustrative weights.
| Position | Share in one source | Loss if that source drops 40% |
|---|---|---|
| Employer stock (single company) | 100% | €8,000 |
| Sector fund (illustrative, one industry) | 100% in one sector, spread across companies | €8,000 (sector-wide shock hits all holdings) |
| Broad world index (illustrative, ~1,600 companies, multiple sectors) | Roughly 2% in any single company | €160 |
The sector fund shows that diversifying across companies is not the same as diversifying across sources of risk — a fund fully invested in one industry still carries full concentration risk to that industry's fortunes, even though it holds many different stocks.
Check yourself
Which situation best describes concentration risk?
An investor holds €15,000 entirely in one company's stock, received through an employee stock plan. The company's stock drops 25%. How much does the position lose, in euros?
A fund holds 50 different companies, but all 50 operate in the same industry. That industry suffers a severe, industry-wide downturn. What happens to the fund?
Which of the following situations exhibit concentration risk? Select all that apply.