Question: As more wealth becomes concentrated in a handful of holdings, what hidden vulnerabilities do investors face when one position dominates their portfolio?

In investing, a common refrain is: “Diversification may preserve wealth, but concentration builds it.” While this idea has intuitive appeal and has sometimes led to exceptional outcomes, it also carries significant risk. A small percentage of investors create wealth through a single stock position. This may come from founding a company, equity compensation, an IPO, or holding a high-performing business.

Yet the same forces that build wealth can also destroy it. Concentrated positions expose portfolios to company-specific and sector risks diversification helps reduce. At Empirical Wealth Management, we define a concentrated position as any single holding that exceeds 10% of a client’s investable assets. Despite emotional ties or tax concerns, the evidence shows that keeping such exposures indefinitely often adds substantial risk.

Research by Professor Hendrik Bessembinder of Arizona State University found that most U.S. stocks fail to outperform even risk-free assets like U.S. Treasury bills. In a study of over 26,000 stocks since 1926, 57.8% reduced rather than created shareholder wealth, with the average stock declining 10% annually (Exhibit 1, below). Just 83 companies accounted for half of all market wealth creation, underscoring how rare long-term outperformance is.

Exhibit 1, Source: CRSP US Stock Database

Later, Professor Antti Petajisto of NYU extended this analysis to large-cap stocks, typical holdings for high-net-worth investors. He found a median 10-year return of -7.9%, with more than half losing value. His work challenged the assumption that past performance justifies continued holding. In fact, top performers over a five-year stretch often underperformed over the next decade, with a median cumulative return of -17.8%. Even large, well-known companies were not immune. Petajisto’s research showed that market leaders often underperformed benchmarks for long stretches, dragging down portfolios despite their strong reputations.

One striking example comes from Emory University, which received a large Coca-Cola stock gift in 1979. Over the next 20 years, the position grew to nearly half the endowment. Despite concerns, the university held firm, confident in the company’s prospects. But starting in 1998, Coca-Cola underperformed the broader market by over 60% in 18 months, and another 25% in the following five years. Even after reducing the position to 10% in the mid-2000s, returns continued to lag (Exhibit 2, below).

Exhibit 2, Source: FactSet

This pattern mirrors what many investors face: reluctance to trim concentrated positions in “great companies.” But strong brands do not guarantee strong performance. Ford, once a dominant name, returned just 4.36% annually over the past 20 years, compared to 10.87% for the S&P 500. Intel, a leader in the 1990s, delivered only 2.82% annually as it fell behind in the mobile era (Exhibit 3, below). Microsoft, now part of the “Magnificent 7,” spent 15 years underperforming, posting just 0.69% annualized from 1999 to 2014 and underperforming the S&P 500 by nearly 4.0% per year (Exhibit 4, below). Coca-Cola, Ford, Intel, and Microsoft remain respected businesses. But their performance underscores a critical point: even great companies can produce lackluster long-term returns. Investors often hold concentrated positions out of confidence or familiarity. History shows that yesterday’s winners are not guaranteed to lead tomorrow.

Exhibit 3, Source: FactSet

Exhibit 4, Source: FactSet

We analyzed the performance of companies that enter the top 10 by market capitalization, an increasingly relevant focus given the dominance of today’s megacap technology stocks in major indices. Historically, companies often deliver strong returns leading up to their inclusion in the top 10. However, this outperformance rarely lasts. Once they reach that scale, many struggle to sustain growth rates needed to support high valuations, resulting in underperformance over time (Exhibit 5, below). While it is impossible to know exactly which companies will falter, the data suggests that some of today’s largest firms may already be approaching this inflection point. Even industry-defining companies face structural headwinds as they grow, including size constraints, rising competition, and evolving economic conditions.

Exhibit 5, Source: Dimensional Fund Advisors

To address the concentrated position dilemma, we offer several solutions. For clients with philanthropic goals, donor-advised funds and charitable remainder trusts offer tax-efficient ways to reduce concentration while supporting preferred causes. Those wishing to retain exposure may prefer a gradual sales approach, spreading transactions over multiple years to manage taxes and ease emotional transitions. This can be paired with tax-loss harvesting. Where sales are impractical, hedging tools—such as covered calls, protective puts, or collars—can help reduce downside risk while maintaining exposure.

Diversification remains the most effective way to reduce concentration risk. Exchange funds allow clients to contribute concentrated holdings in return for a diversified portfolio. Long/short tax-loss harvesting strategies can also reduce concentration and harvest losses without lockups or capacity constraints.
At Empirical, we understand that part of the challenge lies in helping clients manage the emotional biases tied to an individual stock. Selling a position can feel personal, often connected to careers, memories, or admiration for a company’s success. We honor that history while guiding clients through the transition with care. Through data-driven analysis, education, and a disciplined process, we help clients make decisions that align with their long-term objectives. Reducing concentration is never a one-size-fits-all process. Our personalized approach aims to achieve diversification thoughtfully and efficiently, preserving after-tax wealth while positioning portfolios for lasting financial success.

¹ Bessembinder, Hendrik. “Do Stocks Outperform Treasury Bills?” Journal of Financial Economics (JFE), Forthcoming, (2018): 32. Accessed August 6, 2025.
² Petajisto, Antti. “Underperformance of Concentrated Stock Positions.” Brooklyn Investment Group, (2023): 13. Accessed August 11, 2025.
³ FactSet. Total returns as of September, 16, 2025.

*See Disclosures