Underperformance of Concentrated Stock Positions
The case for diversifying out of concentrated positions is even stronger than most investors realize. Outsized positions in individual stocks not only increase portfolio volatility, but usually they also reduce portfolio return. Over the past century, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year. Stocks with strong prior performance have underperformed even more, by 1.94% per year.
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