What is diversification — and what is concentration risk?
Diversification means holding assets that don't all move together. The eggs-and-baskets line is close, but the precise version matters: when investments respond differently to the same events, the bad year of one lands next to the ordinary year of another — the ride smooths out without the long-run return necessarily dropping.
Concentration risk is the opposite condition — too much of a financial life depending on one company, one asset, or one economy. And it hides in places people rarely think to count.
The eggs line, stated precisely
Owning many things is not diversification. Owning things that don't move together is. Ten baskets carried on the same truck are still one bet on the truck.
The technical word for the size of the swings along the way is volatility. Combining assets that zig at different times lowers the volatility of the whole — the destination can stay the same while the path gets calmer.
Why a smoother path matters
If the long-run return is similar either way, why care about the path? Two reasons. Anyone drawing money out along the way — a retiree, for instance — is forced to sell more units when prices are down, so deep dips do permanent damage. And a violent path tests nerves: portfolios are most often abandoned at the bottom of a swing, which turns a temporary dip into a locked-in loss.
The concentration risk people miss
The obvious version is one share making up most of a portfolio. The versions that slip past:
- Employer shares plus a salary from the same company. If the company struggles, the shares fall and the income is at risk — at the same time
- A home, the bond on it, and a job — all in one town, one currency, one economy. Three big exposures that share a single engine
- Two or three "diversified" funds that hold largely the same big companies. Different fund names, overlapping contents — many wrappers, one basket
A bet twice over
Pension funds have long made a simple observation about employer shares: a large position in the company that pays your salary is a bet placed twice — once with your income, once with your capital. Both legs depend on the same set of decisions made in the same boardroom. When it goes wrong, it goes wrong everywhere at once.
What diversification is not
It is not protection against loss — when whole markets fall, diversified portfolios fall too. What it removes is the risk unique to any single holding: the one company that fails, the one property that stands empty, the one sector that gets disrupted. Broad risk remains; single-point-of-failure risk is what gets engineered out.
It is also not about the containers. "TFSA vs unit trusts vs ETFs — how do the wrappers differ?" untangles those; diversification is about what sits inside them.
Terms used on this page
- concentration risk
- The risk created when too much of a financial life depends on one company, asset, sector or economy — so a single event can hit income and investments at the same time.
- volatility
- How much and how quickly an investment's price swings up and down. Higher volatility means a rougher ride along the way — not necessarily a different destination.
Reviewed July 2026