How does diversification reduce risk?
When money is spread across different investments, a loss in one can have less effect on the whole portfolio. In the calculator above, splitting $100,000 across ten equally weighted holdings puts $10,000 in each. If one falls 50% and the others do not move, the portfolio loses $5,000, or 5%.
Putting the entire $100,000 into that one holding would expose the whole portfolio to its 50% loss. The difference comes from how much money was exposed to the holding that fell. This example isolates a single-holding loss; it does not estimate the likelihood of losses across a real portfolio.
Compare concentration with equal weights
These hypothetical portfolios each start at $100,000. One holding falls 50%, while every other holding stays flat. More holdings only reduce the loss in this example because the weight of the affected holding is smaller.
| Equal-weight holdings | Weight of the affected holding | Whole portfolio loss | Money lost |
|---|---|---|---|
| 1 | 100% | 50% | $50,000 |
| 5 | 20% | 10% | $10,000 |
| 10 | 10% | 5% | $5,000 |
| 20 | 5% | 2.5% | $2,500 |
The assumption that exactly one holding falls while every other holding stays flat is essential. If all ten holdings fall 50%, the whole portfolio also falls 50%.
What risk can diversification reduce?
Diversification can reduce exposure to problems specific to one investment, such as a company losing an important customer. Concentration in one sector, region, or economic driver can also make several holdings vulnerable to the same event.
Different names are not enough by themselves. Holdings can overlap or share risks. FINRA explains concentration risk, including overlapping funds and individual positions.
What risk remains?
Wider market declines can affect many investments at the same time. Diversification does not guarantee a profit or protect against every loss. Investor.gov explains diversification and why it cannot guarantee protection when markets fall.
This calculator is not a model of portfolio volatility, correlations, asset allocation, or expected return. It demonstrates how the weight of one affected position changes the impact of its loss.
Questions to ask about your own portfolio
- What share of the portfolio depends on its largest positions?
- Do individual investments overlap with holdings inside your funds?
- Could the same event hurt several holdings at once?
- Are several holdings exposed to the same sector, region, or source of revenue?
- Could you sell the holdings when needed, and at what cost?
For unequal weights, use the portfolio loss calculator. To measure the weight of a specific investment, use the position size calculator.
Frequently asked questions
Does diversification lower investment risk?
It can reduce concentration and investment-specific exposure by spreading money across holdings. It cannot eliminate all risk. What the investments share matters as well as how many you hold.
Can I diversify simply by owning more stocks?
More stocks can reduce exposure to a single company if they reduce its portfolio weight. But stocks in the same sector or funds with overlapping holdings can share risks. A larger count alone is not a complete diversification assessment.
Does this calculator recommend a number of holdings?
No. The holding count is an input for an equal-weight, single-loss illustration. It does not identify an appropriate portfolio size or allocation for your circumstances.
What if more than one holding falls?
The example assumes only one holding falls. With equal weights, add the losses of the affected holdings and divide by the total holding count to get the portfolio loss percentage, while accounting consistently for all holding changes.
Published by investor.wtf. Read the formulas, assumptions, and how these pages are made.