How much of one particular stock is too much to have in your portfolio? Is it 1%, 5%, or even 50%?
Actually, there is no cut-and-dry answer to this question. With that in mind, though, there is a threshold that, if passed, will generally be too much for most investors. Everyone’s situation is different, but the points we’ll discuss today are a good rule of thumb.
Usually when I meet clients with a concentrated position in their stock, it’s because they work at the company those shares come from. A good question to ask yourself in this case is whether you’re going to accumulate stock moving forward. Even if a certain amount of stock is appropriate today, consider whether future accumulation will shift your portfolio out of balance.
Typically, having somewhere between 10% to 15% in a single given stock is appropriate. Having much more than that could land you in hot water if the stock goes down. Having 50% of your portfolio tied up in one stock may be fantastic if things take a positive turn, but the results could be catastrophic if stocks go south. The more concentrated your investments are, the more concentrated your risk becomes as well. Diversifying your portfolio is, therefore, a good way to protect yourself.
That said, you don’t need to invest 10% or 15% in a single stock if doing so would open you up to undue risk. While these figures constitute an appropriate threshold for a concentrated investment, you can certainly invest at a lower rate if it makes sense to do so.
None of this is to say that there are no benefits to owning a concentrated stock position, however. I recently met a client who had a massive concentrated technology stock that he has maintained since the 1990s. As you can imagine, this has led him through some wild swings. Even so, the majority of his net worth is thanks to this stock. He has, in this case, been rewarded by virtue of his concentrated position.
Yet now, as he approaches retirement, the time has come for him to consider diversifying his portfolio—the risks of a downturn now outweigh the potential benefits he might reap should his stocks go up.
The bottom line in today’s message is that the way you set up and manage your portfolio depends heavily on your personal circumstances. There are a number of factors, many of which are related to the balance between risk and reward, that must be weighed as you make these crucial financial decisions. It is for this reason that having professional guidance can be so beneficial.
If you have any other questions or would like more information, feel free to give us a call or send us an email. We look forward to hearing from you soon.