Seeking opinions about the most to have in one investment

[SecondCor521]

My rule of thumb was 5%. I never had a stock that breeched that limit, but I did pay attention to it when I was maxed out on my company ESOP and was holding lots for two years to minimize tax impacts.

Regarding the company being a solid company and a good dividend payer, that may be true. However, those statements also would have applied to Procter and Gamble in the spring of 2000 when the stock priced went from about $58 to $27 in about 8 weeks. (The company and stock did later recover.)

 

[MRG]

I've had well over half my portfolio in my company stock at its peak, mostly in unexercised stock options. It worked great, until it didn't. I've never gone back to figure out whether I'd have done better or worse had I exercised and sold options yearly as they became available, and sold ESPP shares as I got them. It doesn't really matter--I don't even invest in individual stocks anymore, and if I did I wouldn't let them exceed 5-10%.

I get how some of you have huge gains from buying AAPL over the years and are hesitant to sell, especially when you are looking at ACA subsidies. But think about how much the loss of those cost, and how much you could lose if AAPL takes a hit.

+1
I was in a similar situation with too much Megacorp with options, outright equity in retirement fund I couldn't sell, and some probably in a magic fund that had zero visibility into the holdings.

When Megacorp allowed me to take control of it in 08 I rolled one account and slowly sold it all. I left the other account at Megacorp to allow for 55 and separated from service withdrawals. Unfortunately before I turned 59.5 Megacorp allowed one equity in the magic fund to become over 50% of that fund! The equity was on a roll until the feds came in and shut the company down. Now me and 10k of my former peers are slowly winning judgments against Megacorp for breach of fiduciary responsibility. I'm happy to say some people, including myself, have collected a judgment from the fund managers and now we're going after Megacorp and winning. Sadly the former Megacorp executives who oversaw all this took hundreds of millions for their short tenures and walked away.

 

[RetMD21]

Mostly in funds but I also have a HD "problem" but only 1% of assets. I think this depends partly on planned spending and net worth and other factors. That is, Warren Buffett is pretty safe having invested mostly in BRK.

 

[dirtbiker]

My rule of thumb was 5%. I never had a stock that breeched that limit, but I did pay attention to it when I was maxed out on my company ESOP and was holding lots for two years to minimize tax impacts.

Regarding the company being a solid company and a good dividend payer, that may be true. However, those statements also would have applied to Procter and Gamble in the spring of 2000 when the stock priced went from about $58 to $27 in about 8 weeks. (The company and stock did later recover.)

Do you sell successful stock to keep it below 5%? Or do you only buy no more than 5% of your portfolio at purchase? In other words, lets say you buy a stock and it continually outperforms the market and your 5% goes to 10%. The fundamentals still look good, and it's one you'd buy again if you didn't own it, do you sell to keep below 5%? Or let ride?

 

[disneysteve]

Do you sell successful stock to keep it below 5%? Or do you only buy no more than 5% of your portfolio at purchase? In other words, lets say you buy a stock and it continually outperforms the market and your 5% goes to 10%. The fundamentals still look good, and it's one you'd buy again if you didn't own it, do you sell to keep below 5%? Or let ride?

I would sell off some shares. It's no different than rebalancing your portfolio to get back in line with your asset allocation. If your intended AA is 60% stock and it has gotten up to 70 or more because of market performance, do you let it ride or do you rebalance? I think most of us rebalance.

 

[OldShooter]

I also don't think anyone was arguing that it was a superior strategy. They question was, if you find yourself in this position, what should the limit of your exposure be? It's easy to say well, 0% because you shouldn't own individual stocks. But, that adds no value to the conversation. People DO own individual stocks, so it is a valid question that, based on many of the responses, many people are dealing with, particularly with the run up in tech.

Agreed. Though I would argue that conversation provides context that may be relevant to some participating in the thread. If it doesn't apply, the OP can and should ignore it.

 

[SecondCor521]

Do you sell successful stock to keep it below 5%? Or do you only buy no more than 5% of your portfolio at purchase? In other words, lets say you buy a stock and it continually outperforms the market and your 5% goes to 10%. The fundamentals still look good, and it's one you'd buy again if you didn't own it, do you sell to keep below 5%? Or let ride?

I did not end up in that situation. Had I ended up in that situation, I would have sold the excess down to 5% and taken whatever tax consequences there would have been for doing so.

It probably matters somewhat to the conversation that my philosophy generally is to buy and hold long term broadly diversified, low cost, high quality mutual funds. The only time I had to consider the individual stock question, as I mentioned earlier, is because my employer had an ESPP with a very good incentive to participate. I decided that the incentive outweighed the single stock risk of a few percentage points of my portfolio. So my general MO is to make a plan ahead of time and follow my own rules, rather than evaluate things as they come based on specific circumstances.

 

[Markola]

I don't think anyone implied that we owned one stock, just that one stock in our portfolio had grown to now make up a high percentage of that total portfolio.

What’s the difference? One stock is one stock. [emoji848]

 

[brokrken]

What’s the difference? One stock is one stock. [emoji848]

I think there's a difference between owning 1 stock and owning 50 stocks. But perhaps we are just misunderstanding each other.

 

[VFK57]

We have one stock (first we started to purchase and it also had a grant from a company long time ago) @7.5% of our total portfolio of investments. However currently a few of our CD accounts matured and mature this year, while money market and CDs have much lower than inflation interest. On the other hand the stock market and the real estate are at the highest ever price. That is a head ache as I expected that the Market would go up and down until the full recovery would come. I was wrong.

 

[gabrewer]

Thanks all for your input -- interesting perspectives. It seems like a good number believe that 5% is a good rule of thumb, but they might tolerate a little higher but keep an eye on it. I think I'm comfortable in that camp right now.


I can appreciate the perspectives of those who feel that diversified mutual funds are the way to go and avoid individual stocks altogether - but don't agree that it's for everyone. My wife and I made sure we had a solid core of mutual funds in our portfolio before considering buying stocks. Mutual funds still account for the large majority of our assets. So if HD - or another stock we own -- were to go south, it would certainly sting but it would not derail our plan.


Buying stocks is certainly not a "set it and forget it" strategy like buying a target date or life-stage fund. I remember Peter Lynch making the point in one of his books several years ago that if you want to invest in stocks you should be willing to devote a minimum of an hour a week to reviewing your holdings. I can't say I always meet that standard, but I do enough research and review that I'm comfortable owning the stocks that I do. I get the sense that many other posters here have that same level of comfort.


Best to all

 

[Blue531]

If I buy stock in a company with the hopes that it will appreciate significantly, then selling it as it rises in value (raising my percentage of exposure in it) seems to defeat the purpose of owning it.

It isn't easy to find a great performing stock. The more it grows in value, the lower the risk because the amount invested will be small comparatively.

The purpose of having appreciating assets is to let them appreciate. Yes, you will exceed 5 and 10 percent of your portfolio or net worth if you find a good asset. The exposure increases and so does your net worth.

If I sold out so soon, each time, I would have to find another great investment. So I sell a winner to go in search of another and put my money in that? (Rhetorical) That is risky in itself.

Limiting your exposure in a great company can limit your gains. Keeps you safe, though, I guess.

The bottom line is that each investor has to determine for themselves how much risk and exposure he or she is willing to take or how much they can afford to take. Know your tolerance and proceed accordingly. Make your own rules based on you.

 

[RunningBum]

If I buy stock in a company with the hopes that it will appreciate significantly, then selling it as it rises in value (raising my percentage of exposure in it) seems to defeat the purpose of owning it.

You can't assume that it will keep rising after appreciating some. You can hope for that, but only a few continue to soar.

It isn't easy to find a great performing stock. The more it grows in value, the lower the risk because the amount invested will be small comparatively.

The stock market doesn't care how much your original investment was. That's history, except for tax purposes. The value today is what matters. If you want to let a hot stock ride that's your business, but you're just fooling yourself if you don't recognize the risk you are taking with a relatively high % of your portfolio in a single stock, in my opinion.

..

The bottom line is that each investor has to determine for themselves how much risk and exposure he or she is willing to take or how much they can afford to take. Know your tolerance and proceed accordingly. Make your own rules based on you.

Yes, very true. There's no rule that fits everyone. You seem to have a higher risk tolerance. I'm retired and feel like I'm very financially set so I'd rather preserve my money with some growth in case of inflation, but not chase higher returns with more risk.

I like the comment made earlier, I think by OldShooter, that you should be able to absorb a stock going to zero. Unlikely? Think Enron, or MCI.

 

[UnrealizedPotential]

To each his own, but my feeling is when a stock I own reaches or exceeds 10% of my portfolio, I begin to look for a way to diversify. I can't know if that good run continues, what I do know is having too much in one stock could be hazardous to my portfolio, no matter how good of a stock it is.

With todays historically high PE's, and the great run we have already had in the markets, to me it makes sense to spread the risk out, if not even taking some of those gains and holding it in the form of cash.

 

[OldShooter]

... The more it grows in value, the lower the risk because the amount invested will be small comparatively. ...

This is essentially the sunk cost fallacy. (https://en.wikipedia.org/wiki/Sunk_cost) Somewhat the same as the "house money" paradox.

The stock doesn't know what you paid for it, the market doesn 't know or care, and cost should be irrelevant to an investor (except for tax considerations as a minor factor). The correct way to look at an investment holding is to ask whether, at the current price, you would be a buyer. If no, then sell. There is no "hold." Every day you continue to own it is a "buy" decision. Regardless of what you paid.

Another popular version of this fallacy is "I'm going to sell as soon as the stock gets back to what I paid for it." The behavioral finance folks have great fun with this one as an illustration of humans' baked-in loss aversion. Thaler and Kahneman are well worth reading if for only to understand this important effect on our investing behavior.

... Limiting your exposure in a great company can limit your gains. Keeps you safe, though, I guess. ... ...

Exactly. William Bernstein on investing for retirement: “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”

... The bottom line is that each investor has to determine for themselves how much risk and exposure he or she is willing to take or how much they can afford to take. Know your tolerance and proceed accordingly. Make your own rules based on you.

Again, exactly. William Bernstein on concentrations: “Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine”

 

[dirtbiker]

Wouldn't it make more sense to just put a trailing stop loss sell order on a stock that has been over-performing (and thus is more than 5-10% of so of your portfolio)? This way if it continues to fly, you get the gains. If it reverses, you sell and keep most of your profit.

 

[sengsational]

People that had those orders in got fleeced in the flash crash.

 

[OldShooter]

Wouldn't it make more sense to just put a trailing stop loss sell order on a stock that has been over-performing (and thus is more than 5-10% of so of your portfolio)? ...

People that had those orders in got fleeced in the flash crash.

This. A stop doesn't guarantee that you'll be out a the stop price. You'll just be in line with all the other stop loss orders looking for buyers. But many of those orders will be managed by professional traders, which you are not.

In fact, a flash crash could result in your being sold out low, then sitting there watching the market recover almost immediately as you totted up your tax bill.

 

[MRG]

People that had those orders in got fleeced in the flash crash.

+1

Been there done that. Great way to lock in losses.

 

[brokrken]

Wouldn't it make more sense to just put a trailing stop loss sell order on a stock that has been over-performing (and thus is more than 5-10% of so of your portfolio)? This way if it continues to fly, you get the gains. If it reverses, you sell and keep most of your profit.

Also, it seems stop losses always execute. You'd be better off just selling at the market price rather than waiting for it to go down to the stop loss price, especially for a particularly volatile stock.

 

[Fbunt]

75% in Apple. wouldn't recommend it though.

 

[NoiseBoy]

75% in Apple. wouldn't recommend it though.

At one point last year, Berkshire Hathaway's portfolio was roughly 50% in AAPL. From what I can find this morning, it looks like they've reduced their position in AAPL and it's now ~40% of their total portfolio.

FWIW About 15% of my portfolio is in the stock of my former employer. I stopped buying it years ago except with reinvested dividends, yet it has essentially tracked the broader market and remained at that 15% level. I did sell a small amount earlier this year as I was rebalancing my portfolio in preparation for retirement, but for now I do not have any plans to reduce my position just to hit some "rule of thumb" percentage. My former mega-corp is a DOW stock.

 

[dirtbiker]

75% in Apple. wouldn't recommend it though.

At one point last year, Berkshire Hathaway's portfolio was roughly 50% in AAPL. From what I can find this morning, it looks like they've reduced their position in AAPL and it's now ~40% of their total portfolio.

FWIW About 15% of my portfolio is in the stock of my former employer. I stopped buying it years ago except with reinvested dividends, yet it has essentially tracked the broader market and remained at that 15% level. I did sell a small amount earlier this year as I was rebalancing my portfolio in preparation for retirement, but for now I do not have any plans to reduce my position just to hit some "rule of thumb" percentage. My former mega-corp is a DOW stock.

At one point in time, AAPL was nearly 50% of my meager portfolio, in 2009. I sold it all to buy a home that I took a 20% loss on, not including closing costs, when I sold it five years later. I also posted about this in the worst investments thread. Lol. Don't I wish I kept it as an outsized portion of my porfolio!!!

 

[gayl]

I don't really think this should count as it's an index ETF but my largest holding this morning is 87.32% SCHB.

 

[OldShooter]

I don't really think this should count as it's an index ETF but my largest holding this morning is 87.32% SCHB.

Nope. Doesn't count, as it's a broad market fund. That's almost the only way us little guys can really be diversified.

Emphasis is on "broad market." One or a few stock-picker funds in concentrated market segments is NOT diversification. (Sometimes the hucksters include the word "index" in the fund name. Beware.) So it's not about "funds" being OK, it's about "broad market funds" being OK.

RE "Broad US Market" there are those who think true diversification has to include international markets as well, but that's another thread.