The Hidden Risks of Single Stock Portfolios

Welcome to Financial Fluency - your weekly guide to mastering financial English, learning how money works, and making confident financial choices.

In this issue:

• A Look at the Markets: Vanguard FTSE All-World ETF

• The Hidden Risks of Single Stock Portfolios

• Quote of the Day: Jack Bogle

• We value your feedback

• Word of the Day: Diversification

• Your Investment Insights

• Whenever you are ready, here is how I can help you

A Look at the Markets: Vanguard FTSE All-World ETF

The charts above show the return on the Vanguard FTSE All-World index for the year to date (YTD) - the first in USD, the second in Euros - revealing a surprising 12.43 percentage point difference.

The charts show a very large difference in performance with the Euro denomination underperforming the USD because the Euro has strengthened significantly against the US dollar in 2025. Although the index has had an excellent year in dollar terms (+14.45%), the performance has been subdued in Euros (+2.02%), demonstrating how currency movements can overshadow actual investment returns. This shows how investing internationally means you're not just betting on companies but you're also making a currency bet.

Over time, I expect these currency effects will even out and the dollar will strengthen, boosting the return in Euros for patient investors.

The Hidden Risks of Single Stock Portfolios

Improving my mother's investment strategy in modern times

Last week, we saw how my mother's £450 investment in 1975 grew to over £40,000 by 2025 and generates dividends of over £1,000 per year.

But, was she just lucky? Statistically, her return was around the same as the S&P 500 (America's 500 largest companies) over the same timeframe, so her results were not out of the ordinary. She chose UK blue chip stocks that she understood, or at least was aware of from the news. While she could have chosen stocks that would have done a lot better, such as Apple, she could also have chosen companies such as British Leyland that were nationalised with major losses to shareholders.

This week, I want to examine if my mother was taking unnecessary risk.

Hidden Risks

Her portfolio never had more than about ten UK companies — far too few for real diversification.

Most financial experts recommend holding at least 20-30 stocks across different sectors and countries. Although her companies were across different sectors, they were all UK companies and subject to the same national market conditions. If any one of these companies had gone bankrupt, it would have severely damaged her portfolio.

Are there alternatives that were not available to my mother in 1975?

The Solution Was Coming

My mother really needed increased diversification but, as a full-time primary school teacher, did not have the time or inclination to do extensive market research.

Even at the time that my mother started investing, others in the industry were thinking about solutions to a problem that my mother did not know she had: lack of diversification. In 1976, just one year after my mother's investment in ICI, Jack Bogle launched the first index mutual fund in the USA.

Although not yet available to my mother in the UK, this would transform the investment industry for the following decades.

Index Mutual Funds

Index mutual funds are investment vehicles that track a specific market index, such as the S&P 500, by buying all or a representative sample of the stocks in that index.

This means that with a single purchase, investors can own a diversified portfolio of hundreds or thousands of companies without needing to research individual stocks. The fund aims to match the performance of the index it tracks, whether through buying all the stocks directly or using other methods to replicate the index returns. Management fees are typically very low since the fund simply follows the index rather than paying for expensive stock picking (there are active mutual funds which do not follow an index but we will not discuss them in this newsletter for simplicity).

Mutual funds can only be bought and sold at the end of each trading day.

Exchange Traded Funds (ETFs)

Exchange Traded Funds are like mutual funds but can be traded whenever the markets are open - just like buying or selling a share through a broker.

Like index mutual funds, ETFs follow indexes. These are known as 'passive ETFs'. You can invest in ETFs tracking everything from the S&P 500 and FTSE 100 to emerging markets or specific sectors like technology and healthcare. For example, with a single ETF, you could own shares in companies like Apple, Nestlé and Toyota at the same time and with a single purchase.

Had either index mutual funds or ETFs been available in 1975, they would have suited my mother's buy and hold for the long term investing style better and reduced her risk.

Conclusion

Last week we looked at how my mother used the stock market to grow her wealth.

This week, we looked at possible solutions to give greater diversification, reduce risk without necessarily reducing returns.

Next week, I will show you the main types of ETFs available with pros and cons of using them as part of your investment portfolio.

As always, none of this is financial advice. Everyone should invest according to their personal circumstances, risk tolerance and financial goals.

Quote of the Day: Jack Bogle

This quote perfectly encompasses the advantages of investing in index funds from their father, Jack Bogle.

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Your opinion helps us improve and lets you suggest topics or ask Business English questions for future issues.

Word of the Day: Diversification

Diversification - noun - the investment strategy of spreading money across different companies, sectors, or asset types to reduce risk.

Context and Usage: Diversification is a fundamental principle of investing that helps protect your money when individual companies or sectors perform poorly. While you might miss out on the highest possible returns from picking the perfect single stock, diversification provides more consistent, reliable growth over time by reducing the impact of any one investment's poor performance.

Note: True diversification requires more than just owning many stocks - they should be from different industries, countries, and asset types to provide genuine protection against market volatility.

Common Collocations:

Portfolio diversification - spreading investments across different assets Effective portfolio diversification meant her losses in technology stocks were offset by gains in healthcare companies.

Geographic diversification - investing across different countries and regions Geographic diversification protected his investments when the UK market struggled but emerging markets performed well.

Sector diversification - investing across different industries Her sector diversification included everything from utilities to technology, reducing her exposure to any single industry's problems.

Lack of diversification - insufficient spreading of investment risk His lack of diversification became apparent when his portfolio crashed along with the energy sector.

Business Example: The pension fund improved its diversification by adding international bonds and emerging market stocks to complement its existing UK equity holdings.

Investment Context: Diversification is why modern investors favour index funds and ETFs over individual stocks - a single fund can provide instant diversification across hundreds or thousands of companies, something that would be impossible for most individual investors to achieve by buying stocks one at a time.

Your Investment Insights

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Disclaimer:

This newsletter is for informational and educational purposes only and should not be construed as financial advice. The information contained herein is generic and does not take into account your individual financial circumstances. You should always consult with a qualified financial professional before making any investment or financial decisions.

Additionally, the authors and/or publishers of this newsletter may hold investments in securities or other financial instruments mentioned herein. These are included for illustrative purposes only and should not be taken as a recommendation to buy or sell such securities or financial instruments.