"Don't put all your eggs in one basket" is the oldest saying in finance — but behind the adage there is also a precise mechanism. This article describes that mechanism, in numbers and on fictional securities. It does not say how many baskets you need: it shows what baskets do.
Correlation — the word that decides everything
Two securities are correlated when they tend to move together; they are weakly correlated when their movements are largely independent. It is correlation, not the number of securities, that does the work:
- holding ten securities that rise and fall together means holding the same risk ten times — the adage is respected to the letter and betrayed in substance;
- holding two securities whose ups and downs do not coincide already smooths something: when one falls, the other does not necessarily fall at the same moment.
Diversification reduces specific risk — the risk particular to one company. It normally does nothing against market risk: when everything falls together, the baskets fall together.
Concentration — the other side
Concentration is the mirror image: the heavier a position weighs, the more the portfolio's fate depends on a single event. A 50% position that loses 40% costs the whole portfolio 20%; the same loss on a 5% position costs 2%. The arithmetic is brutal and symmetrical — concentration also amplifies successes. That is a fact of structure, not a judgment.
A neutral worked example
Two fictional portfolios of $10,000, two securities each. Security A loses 30% in a year; security B, weakly correlated, gains 6%.
- Concentrated: 90% in A, 10% in B. Result: (9,000 × −30%) + (1,000 × +6%) = −$2,640, or −26.4%.
- Spread out: 50% in A, 50% in B. Result: (5,000 × −30%) + (5,000 × +6%) = −$1,200, or −12.0%.
- Same market, same securities: only the allocation differs, and the gap is 14.4 points. Had A gained 30%, the order would be reversed — the concentrated portfolio would have gained more.
Diversification "predicted" nothing: it reduced dependence on the fate of a single security, in both directions.
What this changes for your tracking
Everyfolio's allocation column (the weight of each position, in %) is the raw data of concentration: it shows who weighs what. The app describes that allocation — the correlation between your securities is not visible in a position table, and no level of allocation is suggested there.
Informative, general content — not personalized advice. For your situation: your institution or an advisor.