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Maximum Percent for Single Security?
Old 06-15-2018, 06:15 AM   #1
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Maximum Percent for Single Security?

Wondering what others use as a top % threshold for a single security in your portfolio.

I just hit 4% with T and I think that’s about my threshold (ok maybe 5%).
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Old 06-15-2018, 06:18 AM   #2
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great question. I've also wondered about this. I'm think you are about right at 5%
but will be interesting to see what board consensus is.
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Old 06-15-2018, 06:30 AM   #3
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I have always used 5% as my limit.
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Old 06-15-2018, 08:30 AM   #4
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Old 06-15-2018, 09:39 AM   #5
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From what I remember reading, it is 10%... but that is for a respected stock, not a flyer...
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Old 06-15-2018, 10:25 AM   #6
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0 %.

I don't see any reason for an investor to be in any individual stocks.

Well, OK, one - I guess you could manage to be more flexible with your cap gains and loss harvesting. But in the long run, I'm not sure it would matter, and doesn't matter for IRAs.

Other than that, it's like any other AA calculation - what's your worst case view of where that investment could go? Only hold as much as the loss you could accept. I assume individual stocks could go to zero.

With a broad-based index fund, you won;t be above ~ 3% in any one holding, and less overall if you have less than 100% of your AA in stocks. You could also spread that out with a small-cap index fund.

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Old 06-15-2018, 10:52 AM   #7
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My threshold is 0%.
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Old 06-15-2018, 11:42 AM   #8
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For my individual portfolio current highest is about 20%. I'm comfortable with that. Even 35% would be fine for a high conviction company.

Baseline is to aim owning 8 to 10 companies. Currently at 5 which is too low, but I haven't enough time to find myself new targets after divesting a few. So have quite a bit of cash drag at the moment.
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Old 06-15-2018, 12:01 PM   #9
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I only invest in mutual funds.

That said, I have a personal limit of 30% for any one mutual fund. That is why I only have 30% Wellesley.
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Old 06-15-2018, 12:12 PM   #10
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My threshold is 0%.
+1.
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Old 06-15-2018, 12:13 PM   #11
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I never purchase single securities. I do have about 8% of my net worth in RSUs from my former company.

The stock has done well over the past few years - better than I had anticipated, and grown to a higher percentage than I'd prefer.

When the time is right regarding ACA income/tax hits/etc., I'll drop that down to less than 5%.
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Old 06-15-2018, 01:43 PM   #12
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As I said I have 4% in T and then my next biggest individual stock are a few at 2% - JNJ, Coke, companies I buy and just hold forever enjoying the dividends. I do have larger percentages (up to 6%) in ETFs but nothing larger than that.
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Old 06-15-2018, 02:23 PM   #13
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Putting aside the idea, which I agree with, that buying individual stocks is not a good idea for individual investors, the real question you are asking involves looking at diversification.

A professional trust administrator will have been given a house rule that something beyone 10% or maybe 15% constitutes an imprudent concentration. He/she will have to justify the concentration to review committee at least annually. One acceptable reason might be that there are huge capital gains in the security. This sometimes happens when a trust grantor saved money by 100% investing in his employers stock. Alternatively, "It's a real good deal and it's gonna go through the roof" is not an acceptable justification for an imprudent concentration.

Markowitz et al will tell you that a properly constructed portfolio will be diversified enough to have diversified away all individual stock risks. Arguments abound on this, but something like 60-100 individual stock holdings, diversified across all sectors, might be recommended. So that's one or two percent per holding. It's a statistical thing -- no exact answers.

Finally, if you are holding individual stocks hoping to hit home runs, then Markowitz's diversification is the last thing you want. You want that stock's moves to have a significant impact on your results. In that case, the sky is the limit as far as concentration is concerned. Maybe you go 100%.
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Old 06-15-2018, 02:25 PM   #14
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+1.
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Old 06-15-2018, 05:40 PM   #15
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I have about 80 different stocks, ETFs, and CEFs. I keep the highest at 2.5% of the portfolio.
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Old 06-15-2018, 06:25 PM   #16
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Warren Buffet holds 45 billion out of a 196 billion portfolio in Apple. He holds another 20 billion in Kraft and 20 Billion in Bank of America and 17 billion in Coca Cola. 5 stocks makes up 50% of his holdings. He does of course advocate no one else do as he does.
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Old 06-15-2018, 06:53 PM   #17
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I have one stock that is 10%, all the others are less than 5.
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Old 06-15-2018, 07:27 PM   #18
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We were fortunate to hit a home run with DW’s former company stock. It started out as options, but we kept much of the stock after options were exercised and eventually grew to over 30% of our holdings. We didn’t get greedy and started diversifying and brought that stock down to about 4% of our portfolio. We have about 40 stocks of which a half dozen are ETFs. The only mutual funds are in DW’s 401k. We saved a bundle by using capital gains vs ordinary income taxes after the options were exercised. I wouldn’t recommend this to just anybody.
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Old 06-16-2018, 04:50 AM   #19
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Markowitz et al will tell you that a properly constructed portfolio will be diversified enough to have diversified away all individual stock risks. Arguments abound on this, but something like 60-100 individual stock holdings, diversified across all sectors, might be recommended. So that's one or two percent per holding. It's a statistical thing -- no exact answers.
Statistics like this ignore one aspect: how well can you understand and follow up 60+ different companies? That introduces a new risk: let's call it ignorance risk.

In the same vein: how is your tenth best idea going to be vs. your best idea? My own bandwidth is limited, tracking 10 companies is quite a cognitive load already.

So it depends on your level of involvement, I'm pretty binary in that perspective. If you are highly involved, concentration is a benefit. If not, it is a liability and you should stay away, and go for a broad index.

An extreme example is owning your own business: highest involvement, high concentration yet can still be a great idea.
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Old 06-16-2018, 10:33 AM   #20
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Statistics like this ignore one aspect: how well can you understand and follow up 60+ different companies? ... If you are highly involved, concentration is a benefit. If not, it is a liability and you should stay away, and go for a broad index. ...
As usual I agree with you, mostly.

The OP's premise (I think) was that he/she was concerned about owning an individual stock. So I accepted that premise.

My point in dragging Markowitz in was that, if the OP's goal in managing stock concentration was diversification, he/she would have to hold many stocks. Too many stocks to be practical, as you point out. From that I expected the OP to conclude that individual stocks was not the path to diversification.

But, hey, give old Harry a break. His 1952 paper was totally theoretical and mathematical, with no concern for practicality. Also, the paper predated Wells Fargo's invention of the index fund and Bogle's commercialization of the idea by close to 25 years. So Harry was pretty much on a different planet.

I do disagree, though that, in the context of individual stock picking, concentration is a benefit. I guess it is a benefit if you are seeking to self-medicate with occasional dopamine shots (Jason Zweig: Your Money and Your Brain) but the statistics say that it is highly unlikely to be beneficial to financial success over the long term. I was talking to a TDAmeritrade branch manager one time and I asked her what their aggregate individual stock traders' results were for the previous year, 2016. "1.5%" was the answer. Of course the Dow was up 13% that year and other indices were up anywhere from 5% (ACWI) to 25%(S&P Small Cap). Worse, I doubt that the 1.5% included consideration of survivorship bias. I don't know how it could have. As Charles Ellis points out, stock picking is a loser's game.
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