Many think about investment risk in terms of market crashes or economic downturns. Something big, obvious, and widely reported. But some of the most damaging financial setbacks come from a completely different direction: a single change, in a single area, that nobody saw coming.
“Risk is what’s left over when you think you’ve thought of everything.” – Morgan Housel
We call it concentration risk. And it shows up in more ways than people realise.
What is concentration risk?
Concentration risk is what happens when too much of your financial future depends on one thing going right. It might be a business, a property, your company’s shares, or an industry. When things are going well, concentration can feel like a strength. But it only takes one unexpected change to reveal just how exposed you are.
Here are a few real-world examples that illustrate this clearly.
When the business is the plan
Imagine building a successful business over decades, only for a sudden shift in your industry to upend everything. A business owner who sells earthmoving equipment or motorhomes might do very well for years. But if fuel prices spike sharply and unexpectedly, demand can dry up almost overnight. Clients who were ready to buy simply wait. Cash flow tightens. And if all of that owner’s wealth is tied up in the business, there is no fallback.
That last point is the critical one. Many business owners reinvest heavily back into the business, draw their income from it, and assume that a future sale will fund their retirement. When things are going well, that feels like a sound strategy. But it means that the same event that hurts the business also hurts the owner’s personal financial position, at exactly the same time. There is no separate pool of wealth to draw on while the business recovers, and no cushion if the sale price turns out to be lower than expected. It only takes one disruption to the industry, the economy, or even a single client relationship to expose just how concentrated that position really is.
When the property plan hits a wall
Property has been a strong performer in recent years, and many Australians have built meaningful wealth through it. But property concentration carries its own risks, and they are not always about price falls.
Consider a couple who purchase a property with a clear plan to develop it. The surrounding blocks have already been developed with multiple dwellings, the zoning appears to support it, and the numbers make sense. Then the council changes the zoning laws. Suddenly the property cannot be developed as planned. Its value drops, and the strategy that looked perfectly sound becomes unworkable through no fault of the owners.
It is also worth considering what concentration looks like in a broader sense. If you own your home and one investment property, both in the same region, a significant portion of your net worth is tied to a single local market. That market has performed strongly in recent years, but the decade and a half before that was largely flat. Relying on continued strong performance in one geographic area is a genuine risk, even if it does not feel like one right now.
Employee share schemes and the quiet concentration trap
One concentration risk that often catches people off guard involves employee share schemes. Many professionals, particularly in finance, technology, and larger corporate environments, accumulate shares in their employer over time. Combined with their salary, this means their income and their investments are tied to the same company.
If that company runs into trouble, the impact will double. Income falls at exactly the same moment that the share portfolio loses value. There is also the question of tax timing: shares received through an employee scheme may attract a tax liability in the year they are received, regardless of whether the shares have been sold. Having a plan for how to manage that, and how to diversify the holding over time, is an important part of financial planning for anyone in this position.
So what does sensible diversification look like?
Diversification does not mean spreading money thinly across everything. It means making sure that if one thing goes wrong, you have not lost everything.
For a business owner, that might mean taking some profit out of the business over time and investing it elsewhere, rather than always reinvesting it back in. It might mean using superannuation more actively as a long-term vehicle, separate from the business. For a property investor, it might mean considering whether it makes sense to take some equity off the table and put it to work in a different asset class. For someone with a significant employee shares, it might mean having a clear plan to sell down gradually and move into a more diversified position.
None of these decisions are simple, and the right approach depends entirely on individual circumstances, goals, and tax positions. But the principle is straightforward: a plan that depends on a single thing going right is more fragile than most people appreciate, until something goes wrong.
Bringing it back to you
The events that derail financial plans are rarely the ones people anticipated. Fuel prices, zoning changes, industry downturns, company collapses: these are not exotic scenarios. They happen regularly. The job of a good financial plan is not to predict them. It is to make sure that when something unexpected does happen, it is a setback rather than a catastrophe.
If you are wondering whether your current financial position is more concentrated than you realised, it is worth having that conversation sooner rather than later. Book a call with our team to uncover where you might be overexposed and what you can do about it.
