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What it calculates: Effective Holdings, Concentration Index (HHI), Largest Holding.
Updated 5 June 2026 · Transparent assumptions
Concentration is measured by weight, not counted by name
Weights of 40, 25, 15, 12 and 8 percent give a Herfindahl index of 0.266 — the sum of the squared weights. The effective number of holdings is its reciprocal, 3.8. The portfolio holds five positions and carries the concentration of fewer than four.
Squaring is what does the work: it penalises large positions disproportionately, so the 40% holding contributes 0.16 of the 0.266 while the 8% holding contributes 0.0064. Five equal positions would give an index of 0.2 and an effective count of exactly 5, which is the benchmark the figure is measured against.
A twenty-stock portfolio with one 60% position is not diversified
Position count says nothing about exposure. A portfolio of twenty stocks where one is 60% and the remaining nineteen split 40% has an effective holding count near 3, and behaves accordingly. The headline number twenty is actively misleading, and the effective figure is the honest one.
This matters most for portfolios that grew rather than were built. A holding that multiplied several times over becomes an outsized share without any decision being made, and the concentration arrives quietly. Running this calculation periodically is how the drift gets noticed before a single position determines the outcome.
Ten bank stocks are one bet held ten ways
The Herfindahl index treats every holding as distinct, which is a weight-based measure and nothing more. A portfolio of ten regional banks in equal weight scores a perfect effective count of 10 and carries essentially one exposure — if the sector falls, all ten fall together.
Genuine diversification requires low correlation between holdings, not just many of them. The practical test is to look through the positions to what actually drives them: sector, geography, currency, interest-rate sensitivity, and the same underlying customer or commodity. A concentration measure and a correlation matrix answer different halves of the question.
Most idiosyncratic risk goes by twenty or thirty, if they are genuinely different
Classic studies found most diversifiable risk removed by twenty to thirty reasonably uncorrelated holdings, with diminishing returns beyond that. Later work using more recent, more volatile data puts the number higher. Either way, the benefit curve flattens, and adding the hundredth position does far less than adding the tenth.
The index also ignores position size relative to the investor. A well-diversified portfolio that represents a household\u2019s entire net worth alongside employment in the same sector is not diversified in any way that matters. The measure describes the portfolio, not the balance sheet around it.
Sources & References
Figures on this page are checked against primary, authoritative sources. Links open in a new tab.
Portfolio ReturnWeighted return across holdings, with the weights checked to 100% and the largest contribution identified.
InvestmentProject lump-sum and regular-contribution growth, plan a goal, and solve future vs present value, with fees and inflation.
Regular InvestmentProject how regular monthly contributions grow over time — SIP-style investing, dollar-cost averaging, inflation-adjusted value, and long-term goals.
Retirement WithdrawalEstimate how long savings last under regular withdrawals (SWP) — drawdown, safe withdrawal rate, inflation, and a year-by-year schedule.
Returns are assumptions, not guarantees. Actual results may vary because of market performance, taxes, fees, inflation, and timing. This is an educational projection, not investment advice.
Published the calculator with its formula, worked example, assumptions, limitations and a bespoke guide, and added an automated formula test suite covering it.
Verified that equal weights return an effective holding count equal to the number of positions, and that concentration always lowers it below that.
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