Investment Strategy

Managing concentration risk in a portfolio

Diversification is a cornerstone of asset allocation, achieved by holding a broad mix of assets across classes, sectors, and geographies. A well-diversified portfolio — including allocations to equities, fixed income, real assets, and alternative investments — can help investors navigate volatility that an individual security, asset class, or sector might experience.

Despite its importance, concentration risk is an often overlooked yet crucial aspect of asset management. Portfolios with sizable exposures — whether to an individual security or asset, sector or sub-sector, or geographic region — are vulnerable to significant losses. Even when diversification is an investor’s objective, portfolios may unintentionally become concentrated over time, increasing the risk of significant losses if the concentrated assets perform poorly.

We believe that asset diversification is essential for managing concentration risk effectively. We deem an allocation to an individual security, sector, or sub-sector that exceeds 10%, a concentrated position. Various reasons may cause portfolio positions to accumulate, including compensation in company stock; building a large real estate portfolio; selling a privately held company and receiving stock proceeds in exchange; or inheriting a sizable amount of a single asset.

Examples of concentrated assets

A few examples of concentrated asset positions include portfolios overconcentrated in equities, fixed income, or cash. Each type of asset overconcentration can amplify volatility and reduce a portfolio’s capacity to weather downturns or capture upside potential.

Equity concentration: Equities are typically the growth engine of a portfolio, but excessive exposure to stocks can lead to heightened volatility. A portfolio heavily tilted toward equities may perform well during bull markets but suffer disproportionate losses during downturns. For example, in the early 2000s, portfolios with large positions in internet stocks suffered losses, and during the 2008 financial crisis, investors overallocated to real estate experienced steep drawdowns. Moreover, sectors or sub-sectors can experience periods of volatility where the subsectors outperform — or underperform — a broader index (see Chart 1). Overconcentration within equities today, such as substantial exposure to artificial intelligence (AI)-related or a handful of mega tech stocks, may pose certain risk should those sectors sell off — like we observed in January 2025.

Fixed-income concentration: U.S. Treasury and Investment-grade bonds historically have been less volatile than equities. However, overconcentration in fixed income can expose a portfolio to certain risks. Rising interest rates can erode bond prices, especially long-term bonds. Holding large allocations to lower-rated bonds increases the chance of experiencing a default. In low-rate environments, fixed-income investors seeking yield may choose to skew their holdings to these riskier bonds, compounding potential losses. Inflation also poses a risk to bondholders as fixed-income returns may not keep pace with inflation.

Chart 1. Performance of Information Technology sector and sub-sectors vary over timeSource: Bloomberg, data as of October 21, 2025. S&P 500 Index, IT Sector Index, Semiconductor subindex, Software subindex, Communication Services subindex. TR = total return assumes reinvestment of dividends and or interest. Past performance is no guarantee of future results. An index is not managed and not available for direct investment. Chart for illustrative and educational purposes only and does not reflect actual trading of any securities or portfolio. See pages 9-10 for index definitions. Index to 0 on January 1, 2015.

Cash and cash-alternatives concentration: While cash (alternatives) can provide liquidity and stability for a portfolio, our research suggests that holding too much cash may impede long-term portfolio growth. Over time, a cash-heavy portfolio may fail to meet an investor’s investment objectives, especially for long-term goals like retirement. Moreover, excessive cash holdings can reflect market-timing behavior, which may impede performance.

Managing concentration risk

Concentration risk can undermine a portfolio’s resilience and long-term performance. To help mitigate concentration risk, investors might consider the following strategies:

• Diversify across and within asset classes: Maintain a broad mix of equities, fixed income, real assets, and alternative investments (for qualified investors) across sectors and geographies that is tailored to an investor’s return objective, risk tolerance, and time horizon.
• Adhere to an appropriate investment objectives: Review portfolio allocations and rebalance holdings to target weights regularly.
• Avoid behavioral biases: Be wary of common investor tendencies like chasing winners and losers or recency bias — using recent experience as a baseline for measuring risk and return.

We advise investors to select an asset allocation strategy that is based on their financial goals, time horizon, and ability and willingness to withstand market ebbs and flows. By maintaining a mix of assets, we believe investors can better navigate market volatility and potentially smooth returns. And under certain market conditions, it may make sense to take action on tactical opportunities by increasing exposure to a favorable asset class or sector.

We recommend reviewing a portfolio’s asset allocation, at least annually, to ensure that it continues to align with the designated return objective and risk tolerance. We encourage investors to talk with an investment professional about questions or concerns they may have about concentration risk or their portfolio’s asset allocation strategy. 

U.S. Government Shutdown: Potential impact on equity markets

The government shutdown has now entered its fifth week with no prospect of a solution. Talks are going nowhere as Senate Democrats have demanded that health care subsidies from the Affordable Care Act (ACA) passed during the COVID-19 era be extended as part of any funding bill, while Republicans insist on opening the government first before negotiating.

Since 1976, there have been 20 government shutdowns lasting for a day or more. The most recent one in December 2018 lasted 34 days, setting a record as the longest in U.S. history (see Table 1). As shown, government shutdowns have had little lasting impact on equity performance. Stocks were positive half the time during the government closures and were higher in most cases three, six, and 12 months later.

This shutdown is different from the prior shutdown since during the December 2018 shutdown, five of the 12 appropriations bills had been passed, and the bulk of discretionary nonessential spending was all set. This time, it is a full shutdown with all nonessential spending affected. Secondly, the Trump administration has indicated that it could use the shutdown as an opportunity to reduce the federal workforce and cut programs that do not align with the president’s agenda.

We think there is an increased risk of a longer shutdown this time, but the markets’ sanguine response so far illustrates a view that the labor market is strong enough to support these potential layoffs. We do not know how long the shutdown will last, but our guidance remains to look through the event to what we expect will be the main drivers of the economy and investment returns through the next 12 – 15 months. These drivers include deregulation, extensive tax cuts for businesses and households, a trajectory for further Federal Reserve (Fed) interest rate cuts, and a solid trend for further technology spending.

Table 1. Market action around Federal government shutdowns (S&P 500 returns %)

Shutdown Start	#Days	Shutdown End	Week Prior	During	Week after	3 Month After	6 Month After	12 Month After
9/30/1976	10	10/11/1976	-1.6%	-3.4%	-0.2%	3.3%	-1.5%	-6.6%
9/30/1977	12	10/13/1977	1.6%	-3.2%	-0.8%	-4.0%	-3.4%	12.0%
10/31/1977	8	11/9/1977	0.8%	0.7%	2.7%	-2.9%	3.5%	1.5%
11/30/1977	8	12/9/1977	-1.7%	-1.2%	-0.3%	-6.2%	6.9%	3.2%
9/30/1978	17	10/18/1978	0.7%	-2.0%	-3.2%	-1.0%	0.6%	3.1%
9/30/1979	11	10/12/1979	-1.0%	-4.4%	-2.8%	5.2%	-1.3%	24.7%
11/20/1981	2	11/23/1981	0.0%	-0.1%	3.9%	-6.9%	-5.5%	9.3%
9/30/1982	1	10/2/1982	-2.7%	1.3%	7.4%	15.3%	25.4%	36.2%
12/17/1982	3	12/21/1982	-1.5%	0.8%	1.6%	9.1%	22.0%	18.0%
11/10/1983	3	11/14/1983	0.6%	1.3%	-0.3%	-6.2%	-4.9%	-0.4%
9/30/1984	2	10/3/1984	0.3%	-2.2%	-0.2%	3.0%	11.6%	13.5%
10/3/1984	1	10/5/1984	-2.3%	0.1%	0.9%	1.2%	10.1%	12.6%
10/16/1986	1	10/18/1986	1.6%	-0.3%	-0.2%	11.5%	20.1%	18.4%
12/18/1987	1	12/20/1987	5.9%	0.0%	-0.5%	8.8%	8.6%	11.9%
10/5/1990	3	10/9/1990	1.8%	-2.1%	-2.0%	3.4%	23.0%	23.5%
11/13/1995	5	11/19/1995	0.7%	1.3%	0.0%	8.0%	11.5%	22.8%
12/15/1995	21	1/6/1996	-0.2%	0.1%	-2.4%	6.3%	9.0%	21.3%
9/30/2013	16	10/17/2013	-1.2%	3.1%	1.1%	6.6%	6.3%	8.9%
1/19/2018	2	1/22/2018	0.9%	0.8%	0.7%	-5.7%	-1.1%	-7.1%
12/21/2018	34	1/25/2019	-7.1%	10.3%	1.6%	9.8%	13.3%	23.7%
Average	8		-0.2%	0.0%	0.3%	2.9%	7.7%	12.5%
Positive%			55%	50%	40%	65%	70%	85%

Sources: History, Art & Archives, and U.S. House of Representatives, “Funding Gaps and Shutdowns in the Federal Government,” October 22, 2025. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results.

Negative positions against the U.S. dollar build

While the U.S. dollar has stemmed some of its losses from early in the year, market participants appear unconvinced. Despite increased investment in U.S. dollar-denominated assets from abroad, many traders (speculators) have continued to bet against the dollar throughout 2025; partially from investors looking to hedge their exposures to assets priced in dollars and partially from those looking to directly bet on a further depreciation. The chart (see Chart 2) below shows that foreign exchange traders are heavily invested in euro and yen contracts, expecting these currencies to strengthen relative to the dollar.

Chart 2. Speculator net positions in euro and yen futures contractsSources: Bloomberg and Wells Fargo Investment Institute as of September 23, 2025. Speculator net contracts represented by non-commercial contracts in U.S. futures contracts as reported by the Commitments of Traders report (CFTC). A positive number represents a net long position in the currency and a negative number a net short position.

This reflects widespread pessimism about the dollar, which could weigh on its performance in the near term. This may be magnified if concerns that could impact the dollar, such as continued rate cuts or a U.S. economic soft patch build into early 2026. As of late October, we see the potential for a slight retread lower in the dollar moving into year-end 2025.

As we look into 2026, we believe this widely negative view for the dollar should dissipate. In our view, it would not take much of a sentiment shift next year to lead many investors to reverse their bets against it — potentially boosting its value as they rush to fill these negative positions. This shift in sentiment could be caused by a host of factors including an early stall in the Fed’s rate cutting cycle, stronger U.S. growth, or rising political risks internationally — all of which we see as significant possibilities. We continue to forecast a slight rebound in the dollar by year-end 2026. This outlook for added dollar strength contributes to our preference for U.S. equities and fixed income over international. 

Oil supply a sizeable headwind

Last week, West Texas Intermediate (WTI) oil traded near the 2025 low in the mid-$50s before announced U.S. sanctions on Russian oil producers caused a late week spike (see Chart 3).

What happened to drive prices near the lows of the year? In short, supply has overwhelmed demand, while the geopolitical risk premium that had been embedded in prices had been reduced. The oversupply condition is largely due to OPEC+ , which has been bringing previously idle oil production back online. Meanwhile, de-escalation of conflicts in the Middle East, as well as market expectations of the same for Russia’s war in Ukraine helped drag prices lower—that is before announced U.S. sanctions on Russia caused a 5% spike as those expectations were dashed. Still, even after the announced sanctions, WTI oil price only reached an intraday level on October 23 near $62 per barrel—well below the $80 early year high, as supply remains a sizeable headwind.

What now? We believe a modest softening of the economy in the near term, combined with OPEC+’s seemingly aggressive intention of adding oil supply, will keep oil prices under pressure in the coming months. However, we believe this supply deluge will eventually ease. WTI oil prices are below the $65 average breakeven cost for new oil wells in the U.S. This suggests that U.S. oil production growth will likely stall, as it becomes unprofitable for an increasing number of domestic oil producers to drill new wells as oil prices decline further. Additionally, the OPEC+ campaign to increase production is on track to conclude in 2026, notably tightening the global oil-supply spigot.

Looking through to year-end 2026, we forecast the improving supply outlook, coupled with a reaccelerating economy, will push WTI oil prices into our target range of $65-$75 per barrel.

Chart 3. Oil prices revisited 2025 lowsSources: Bloomberg and Wells Fargo Investment Institute, data is from October 18, 2024, through October 23, 2025. Past performance is no guarantee of future results.  

Liquid alternative strategies rose with equities in third quarter

We reviewed third-quarter 2024 and year-to-date performance data for liquid alternative Equity Hedge, Event Driven, Global Macro, and Relative Value strategies. Performance across various Wilshire Liquid Alternative indexes, which track the respective liquid alternative mutual funds, reflect these trends (see Chart 4). We have also shown the S&P 500 Index which rallied during the third quarter, driven by strong corporate earnings, enthusiasm behind AI, and a rate cut by the Fed.

• The Wilshire Liquid Alternative Equity Hedge Index reported gains in August and September mostly from Fundamental Long/Short Equity sub-strategies as the environment was favorable for stock picking. Growth and momentum-oriented stock selection and factors drove gains. Value factor also drove gains, particularly among small-cap stocks.
• The Wilshire Liquid Alternative Event Driven Index reported gains as several corporate mergers made significant progress towards deal completion. Corporate spinoff and restructuring events also progressed well, with limited impact from the impending U.S. government shutdown.
• The Wilshire Liquid Alternative Global Macro Index reported gains from price-based trend-following strategies. Gold prices hit multiple fresh record highs, while silver prices hit a 14-year high during the quarter, which resulted in gains. Global Macro strategies recovered from losses suffered during the second quarter, showing year-to-date gains.
• The Wilshire Liquid Alternative Relative Value Index reported small gains as credit spreads tightened from the tariff-related spikes in April and June. Interest rate duration exposures contributed as the Fed cut rates by 25 basis points (0.25%) in September. Convertible bond strategies contributed as the bonds captured some of the underlying stock’s price appreciation.

Chart 4. Performance of S&P 500 and Wilshire Liquid Alternative indexes during third-quarter and year-to-date 2025Sources: Bloomberg and Wells Fargo Investment Institute. Data from January to September 2025. Wilshire Liquid Alternative Equity Hedge, Event Driven, Global Macro, and Relative Value indexes provide representative performance of the four broad categories of hedge funds used within Wells Fargo Investment Institute. These indexes have daily track records going back to July 2014 and include ’40 Act mutual funds that have at least six months of returns for being included in the index. Included funds pursue the respective investment strategy as defined by Wilshire Manager Research. Past performance is no guarantee of future results.

Alternative investments, such as hedge funds, private equity, private debt and private real estate funds are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.

Cash Alternatives and Fixed Income

Equities

Real Assets

Alternative Investments**

Source: Wells Fargo Investment Institute, October 27, 2025.

*Tactical horizon is 6-18 months

**Alternative investments are not appropriate for all investors. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. Please see end of report for important definitions and disclosures.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market.

Investments in currencies involve certain risks, including credit risk, interest rate fluctuations, fluctuations in currency exchange rates, derivative investment risk and the effect of political and economic conditions. The use of currency transactions to seek to achieve gains in the portfolio could result in significant losses to the portfolio which exceeds the amount invested in the currency instruments. In addition, exchange rate movement between the U.S. dollar and foreign currencies may cause the value of the fund’s investments to decline.

Cash alternatives typically offer lower rates of return than longer-term equity or fixed-income securities and provide a level of liquidity and price stability generally not available to these investments. Some examples of cash alternatives include: Bank certificates of deposit; bank money market accounts; bankers’ acceptances, federal agency short-term securities, money market mutual funds, Treasury bills, ultra-short bond mutual funds or exchange-traded funds and variable rate demand notes. Each type of cash alternatives has advantages and disadvantages which should be discussed with your financial advisor before investing.

Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing.

Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.

An index is unmanaged and not available for direct investment.

S&P 500 Index: A broad market index representing the performance of 500 large-cap U.S. companies across all sectors. It serves as a benchmark for overall U.S. equity market performance.

S&P 500 Information Technology Sector Index: A sector-specific index tracking the performance of companies within the Information Technology sector of the S&P 500. This includes firms involved in software, hardware, semiconductors, and IT services.

S&P 500 Semiconductor Subindex: A subsector index within Information Technology that focuses specifically on companies engaged in the design, manufacture, and distribution of semiconductor products.

S&P 500 Software Subindex: A subsector index that tracks companies primarily involved in software development, licensing, and services, including enterprise and consumer software providers.

S&P 500 Communication Services Subindex: An index representing companies in the Communication Services sector, including media, entertainment, telecommunications, and interactive media services.

Wilshire Liquid Alternative Index measures the collective performance of the five Wilshire Liquid Alternative strategies that make up the Wilshire Liquid Alternative Universe. The Wilshire Liquid Alternative Index is designed to provide a broad measure of the liquid alternative market by combining the performance of the Wilshire Liquid Alternative Equity Hedge Index, Wilshire Liquid Alternative Global Macro Index, Wilshire Liquid Alternative Relative Value Index, Wilshire Liquid Alternative Multi-Strategy Index, and Wilshire Liquid Alternative Event Driven Index. The objective of the Wilshire Liquid Alternative Index is to provide a representative baseline for how the liquid alternative investment category performed as a whole. The index weights are derived from the assets under management (AUM) for each constituent fund with caps on weighting applied at both category and strategy level.

Wilshire Liquid Alternative Equity Hedge Index measures the performance of the equity hedge strategy component of the Wilshire Liquid Alternative Index. Equity hedge investment strategies predominantly invest in long and short equities. The objective of the Wilshire Liquid Alternative Equity Hedge Index is to provide a broad measure of the equity hedge sub-strategy of the liquid alternative market. The index weights are derived from the assets under management (AUM) for each constituent fund with caps on weighting applied at both category and strategy level.

Wilshire Liquid Alternative Event Driven Index measures the performance of the event driven strategy component of the Wilshire Liquid Alternative Index. Event driven strategies predominantly invest in companies involved in corporate transactions such as mergers, restructuring, distressed, buy backs, or other capital structure changes. The objective of the Wilshire Liquid Alternative Event Driven Index is to provide a broad measure of the event driven sub-strategy of the liquid alternative market. The index weights are derived from the assets under management (AUM) for each constituent fund with caps on weighting applied at both category and strategy level.

Wilshire Liquid Alternative Global Macro Index measures the performance of the global macro strategy component of the Wilshire Liquid Alternative Index. Global macro strategies predominantly invest in situations driven by the macro-economic environment across the capital structure as well as currencies and commodities. The objective of the Wilshire Liquid Alternative Global Macro Index is to provide a broad measure of the global macro sub-strategy of the liquid alternative market. The index weights are derived from the assets under management (AUM) for each constituent fund with caps on weighting applied at both category and strategy level.

Wilshire Liquid Alternative Relative Value Index measures the performance of the relative value strategy component of the Wilshire Liquid Alternative Index. Relative value strategies are focused on the valuation discrepancy in the relationships between markets or securities. The objective of the Wilshire Liquid Alternative Relative Value Index is to provide a broad measure of the relative value sub-strategy of the liquid alternative market. The index weights are derived from the assets under management (AUM) for each constituent fund with caps on weighting applied at both category and strategy level.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

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