How Likely Is a Single Stock to Tank Your Portfolio?
Investing in individual stocks can be exciting and risky. One of the biggest concerns for investors is the possibility that a single stock could significantly drag down their entire portfolio. But how likely is that to happen? And what can you do to protect your investments?
In this blog post, we explore the risks of individual stocks, how diversification can protect you, and what the data says about avoiding catastrophic losses.
The Risk of a Single Stock Dropping 50% or More
When we refer to a stock “tanking,” we typically mean a sharp decline, often by 50% or more, due to events such as poor earnings, scandals, or even bankruptcy. Such steep drops aren’t just theoretical.
According to financial expert Mark Minervini, even market-leading stocks often decline by 50% from their peak during market downturns. These big-name winners fall 50% around 80% of the time once they begin a decline. Additionally, most stocks tend to produce subpar results over their lifetime.
So, even high-flying stocks aren’t safe. And if your portfolio isn’t diversified, a single tanking stock can cause major damage.
Why Individual Stocks Are So Risky
Historical data paints a sobering picture. According to Dimensional Fund Advisors:
- Only about 20% of stocks outperform the market over a 20-year period.
- Roughly 20% of stocks delist within 5 years.
- Around 18% face “bad delisting” (such as bankruptcy) within 20 years.
- The median stock underperforms across 5-, 10-, and 20-year periods.
These numbers reveal that betting on individual stocks is risky: most either underperform or fail outright over the long term.
Diversification: Your Best Defense Against a Tanking Stock
The best way to reduce the risk of one stock wrecking your portfolio is through diversification.
Joel Greenblatt, a well-known investor, found that:
- Owning just 2 stocks reduces company-specific risk by 46%.
- 4 stocks reduce it by 72%.
- 8 stocks reduce it by 81%.
- 32 stocks reduce it by 99%.
The more stocks you own, the less any one stock matters. Here’s how it plays out:
| Number of Stocks | Weight of Each Stock (%) | Portfolio Drop from 50% Stock Decline (%) |
|---|---|---|
| 5 | 20% | 10% |
| 10 | 10% | 5% |
| 20 | 5% | 2.5% |
| 50 | 2% | 1% |
| 100 | 1% | 0.5% |
As you can see, in a 5-stock portfolio, one stock dropping 50% will knock 10% off your total value. In a 100-stock portfolio, that same drop only costs you 0.5%.
Not All Diversification Is Equal
Just holding multiple stocks isn’t enough. Proper diversification involves spreading your investments across various sectors, industries, and asset classes, such as bonds, real estate, and international equities.
For example, holding 10 tech stocks doesn’t protect you if the entire tech sector crashes. Real diversification involves mixing different types of investments to reduce overall portfolio risk.
What If You Can’t Afford to Diversify?
If you’re a small investor, owning dozens of individual stocks might be out of reach. But there’s a simple solution: mutual funds or index funds.
These funds pool money from many investors to buy a wide range of stocks. For example, the S&P 500 index fund gives you instant exposure to 500 large U.S. companies. It’s cost-effective and provides built-in diversification.
Financial experts often recommend index funds for anyone with less than $250,000 to invest. They reduce the risk of a single stock dragging down your returns, and they’re easier to manage.
The Danger of Concentrated Stock Positions
Many investors hold large positions in a single stock, especially if it’s their employer’s stock. This can be risky. Tools like Morgan Stanley’s Equity Vulnerability Score can help assess how exposed your portfolio is to a single stock.
If one stock makes up a big portion of your investments, you could be vulnerable to a major drop, even if the rest of your portfolio is diversified.
Diversification vs. Missing Out on Big Winners
One downside of diversification is that you may miss out on the huge returns of a single breakout stock. But history shows that the odds are stacked against individual stocks. Most underperform, and a few big winners carry the market. Almost all retail investors underperform the indices.
The goal isn’t to chase the next Apple or Amazon; it’s to build a resilient portfolio that can weather market volatility.
As Vanguard puts it, diversification is one of the most important strategies for long-term success. It balances risk and return, smoothing out the bumps in your financial journey.
Final Thoughts: How to Protect Your Portfolio
So, how likely is a single stock to tank your portfolio? Quite likely if you’re not diversified. Historical data shows that most stocks underperform over time. But by owning more stocks, and spreading them across sectors and asset classes, you can dramatically reduce the risk of one company dragging down your entire portfolio.
Key Takeaways:
- A single stock can drop 50% or more, often without warning.
- Most individual stocks underperform or fail to deliver returns over the long term.
- Diversification is the best way to protect your portfolio.
- Index funds and mutual funds offer affordable diversification.
- Don’t put all your eggs in one sector—or one stock.
By taking a diversified approach, you ensure your portfolio is built for resilience, growth, and peace of mind.