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What is the highest percentage you’d ever allocate to a single stock?

hank
edited August 2023 in Other Investing
Fido’s (available) portfolio screener seems to sound a “concentration” warning somewhere north of 5% (for a given stock). Prefer to stay out of this one. Curious what others think or what they’ve been comfortable with in the past.

Individual stocks (not funds).

Your % number? ___ Reason / past experience?

Note: Warren Buffet would likely get flagged by Fido’s analytics with around 40% of his stock portfolio in AAPL.
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Comments

  • AnnaAnna
    Checked and, without actually considering the percent, it turns out to be exactly 5.0% in fact.
  • yogibearbullyogibearbull
    That is for individual stocks. Idea is that a portfolio of stocks should have 20+ holdings - otherwise, don't bother and just stick to funds. Stocks are volatile, and some crash, or even go bankrupt. So, the hit is limited to 5% per company.

    It doesn't apply to funds that tend to be diversified.
  • hank
    edited August 2023
    @Yogibearbull. Thank you. The OT intentionally refers to stocks (not funds which by definition are diversified)*.
    I’ll assume you wouldn’t ever exceed 5% for any 1 stock.

    * Edit / Add: The Investment Company Act of 1940 does set standards for identifying funds as ”diversified” / ”non-diversified”. And Yogi is correct in that most of the funds that receive attention here fit the ”diversified” description.
  • Observant1
    edited August 2023
    I invest mostly in mutual funds and ETFs but do own one individual stock.
    I prefer to limit individual stocks to ≤ 5% of my total portfolio.
    This offers protection against potentially large losses from overly concentrated positions.
    Extremely concentrated equity positions were a significant factor
    in achieving wealth for some of the richest people on earth.
    With that said, I don't expect to join the billionaire's club but hope to achieve more moderate financial success.
  • CrashCrash
    Still growing my single-stocks. Biggest holdings are right now at 4.84% and 4.1% of my overall total. I could certainly see putting maybe 8% or higher of my total in those two. Good dividend payers, solid track record. I'm holding a total of 5 stocks. Gonna get rid of one particular loser after the week-end. 4 to 5 stocks might be a sweet-spot for me. KISS the thing.
  • rsorden
    edited August 2023
    I've a feeling I'm the big outlier here...66% of my investments are in 1 stock. Though my portfolio is for sure unlike any here....15% wine & spirits, 10% cattle, around 1% mutual funds, and the rest rental real estate.
  • BenWPBenWP
    Way back when biotech had really hot streaks, CELG grew so much that it paid for a wedding and still occupied way more than 5% of our Schwab account. Then biotech cooled off and BMY bought the company and screwed the shareholders out of some rights we had earned. Some &%@#ers in green eye shades did their jobs on us.
  • hank
    Thoughts on the subject from T. Rowe Price:

    There is no set definition for what makes a concentrated position. When an investment in a single stock represents more than 5% of a portfolio, T. Rowe Price advisors consider it to be worth addressing. Once a holding exceeds 10%, however, it represents a greater risk that requires more immediate planning. “Most situations we see aren’t in a gray area, however,” says Daniel Tafoya, CFP®, a financial planner with T. Rowe Price. “Clients with concentrated positions often have 20% or more of their portfolio invested in a single company. This level of concentration is clearly a concern.”

    Source: https://www.troweprice.com/personal-investing/resources/insights/actions-can-take-if-your-portfolio-is-too-concentrated-in-one-equity.html

  • MarkMark
    I hold between 12-15 individual stocks at any one time and usually aim for 3-5% each. At present most are sitting at the 5% mark.
  • PRESSmUPPRESSmUP
    edited August 2023
    52% of my portfolio are individual stocks, currently 14 companies. I generally subscribe to a target of about 3.5-4% or so, but it depends on what's happening within the business. As an example, I see no reason to trim Broadcom, which is about 5%. So...I would view FIDO's concentration "warning" purely as an advisory notification. My largest position overall is a clinical stage bio-tech, at 14% of the total portfolio. Most likely not wise, but so be it.
  • Old_JoeOld_Joe
    So far it seems like the consensus is something around 5% for the high limit on an individual stock.
  • hank
    edited August 2023
    Old_Joe said:

    So far it seems like the consensus is something around 5% for the high limit on an individual stock.

    Umm … There’s one poster who reports having 65% in one stock. Another has 1 stock @ 14%. That would skew the “average” above 5% methinks.

    Most interesting. Appreciate all the comments. There is, of course, no “right” answer, although a lot of online gurus suggest 5% as a “high water” mark. A few say up to 10%. One went so far as to suggest an ideal allocation would consist of just 10 stocks at 10% each. But that last one is an outlier and not the norm.

    Agree with @PRESSmUP on the Fido point. I should make clear that only when you go into their (optional) portfolio screener and hit “scan” does it flag the concentration and explain the risks inherent in such a concentration. So, it’s more of an informal advisory than any policy or rule.
  • Old_JoeOld_Joe
    edited August 2023
    @hank- consensus- a general agreement. Not an "average". A consensus can certainly have outliers. For example, a panel of three legal judges can have a consensus verdict of "yes" with two out of three opinions, the third opinion being "no".
  • hank
    edited August 2023
    Old_Joe said:

    @hank- consensus- a general agreement. Not an "average".

    Got it. Thanks @Old_Joe. I’d guess the consensus from my 10-15 web searches also falls around that 5% number.

    Call it ”conventional wisdom”.
  • msf
    To skew the data a bit further, my largest single stock holding constituted somewhere between 30% and 40% of my portfolio (including cash, which was a large percentage).

    That was when I was young and foolish, working at my second company - a startup that had recently gone public and offered an ESPP with a 15% discount. My records going back that far are sketchy so all I can give is a ballpark estimate (from tax filings, mortgage application, etc.).

    I was very lucky. Conventional wisdom is not to hold (much) stock in the company you work for - they can both go bust at the same time.
  • MikeMMikeM
    edited August 2023
    @msf made me think back to being young and 'probably' foolish. Our company's original 401k plan had only 4 options, one of them being the companies stock (Kodak). Being a DOW blue-chip stock for so long, I and many of my coworkers typically had 50% or more in the stock all through the 70's and 80's and even into the 90's.

    Today any individual stocks I buy are only with my "play" money, no more than 2-5% of my self managed portfolio. Today, the only 2 stocks I own are ASML and MSFT.
  • Sven
    We did have a few individual stocks over 5% each when we were young. These days we invest mostly through mutual funds, ETFs, and few individual stocks, Getting a modest return is good enough for us as we learned to be better investors over time.

    When Morningstar X-Ray tool was available, it would provide individual stock % from our portfolio and the overlaps of certain stocks. The mega-tech stocks still drive the market, but lately the tide is turning against them.
  • yogibearbullyogibearbull
    ERISA/DOL no longer allow limiting company retirement plans to company stocks.

    Companies may still use their stocks in special profit sharing and incentive plans, etc. They may also require high-level executives and board members to have sufficient skin in the game. But for most employees, it's good advice NOT to use much of company stock in their retirement plans.
  • Sven
    Many Enron employees regretted holding mostly Enron stock in their 401(k) plan.
  • Tarwheel
    One only needs to consider GE to see the risk of only holding one or a few stocks. This was the only stock we owned for many years, a gift from my wife’s grandfather.Twenty-five years ago, it was the largest company in the world by stock value. Now, it’s worth a small fraction of that. Fortunately, we sold portions of it during its heyday, for down payments on houses. Plus, we’ve only invested in stocks through mutual funds in our retirement savings. GE was by far our largest asset when we married; now it’s less than 0.5% of our savings.
  • CrashCrash
    A relative worked at Monsanto, forever, working her way up from the typing pool. She owned a ton of Monsanto stock, which became Pharmacia and then Pfizer. Monsanto was ALWAYS in hot water, legal trouble. Could not get out of their own way. The early inheritance she gave us, I sold and redeployed. For a while, it was a big chunk of my total. Don't recall accurately. Don't want to do that again.
  • rforno
    edited August 2023
    I've had single positions as high as 20% in one of my accounts when some stuff had appreciated significantly. The last time that happened was with BA, and I thankfully got out early into that multi-year 737MAX fiasco.

    Most of my single stock positions are 2-10% depending on their role/status in my portfolio and/or as I'm building a position. Mutual funds are higher allocations.
  • AZRph
    With my previous employer (a big box retailer) from whom I retired last year after 35 years, due to a 15% employer match and rapid appreciation its stock alone escalated to 25% of my portfolio. Have whittled that down to @10% after using proceeds for mortgage down payment and charitable gifting. No hurry to reduce further as company pays a dividend and is stable.
  • johnNjohnN
    edited August 2023
    Live - die by tsla 15% of portfolio/
    OPTIONS - Strangle tsla wkly 12 15% delta to squeeze out additional +0.25% weekly premiums / hope for 12 13% additional premiums by yr end
  • FD1000
    A real story: in 2000, 2 retirees from GE and Lucent came to work on my team just for another 3-4 years.
    Both invested all/most of their money in their company stocks. The GE guy had about $360K in GE stock and the Lucent guy had about $300K. The market started going down and they started losing a lot of money, I begged them to sell but they didn't.
    The GE kept saying that GE is diversified and the other guy couldn't believe it will go longer.
    The Lucent guy lost everything. The GE guy lost a lot too. 10 years later they still worked and postponed their retirement. GE lost about 60% from 2000 to 2010(https://schrts.co/HEVxxEdE)
  • Roy
    This is interesting given that the aforementioned fund companies (Fidelity and TRP) allow some of their fund managers to hold more than 5% positions in companies.

    As an example for a couple of widely held funds from these investment shops;

    Fidelity Blue Chip Growth, FBGRX
    Apple, 10.03, NVIDIA, 9.68, Microsoft, 9.13, Amazon, 7.54, Alphabet, 5.37

    TRP Blue Chip Growth, TRBCX
    Microsoft, 14.00, Apple, 11.3, Amazon, 7.69, Alphabet, 6.19, NVIDIA, 5.92

    Portfolio info from M*.
  • yogibearbullyogibearbull
    @Roy, both of your examples are for LC-growth.

    A problem with this category is that the LC-growth index has become nondiversified. Fund companies are handling this in two ways: i) ignore the index and be diversified as per ICA 1940. Active funds can do this. ii) File with the SEC to reclassify the fund as nondiversified. This is what MANY active and passive LC-growth funds are doing.

    DIVERSIFICATION 75-5-10 rule (ICA 1940) refers to the requirement that 75% of the fund assets have less than 5% of fund assets in each holding and less than 10% of the outstanding shares of any holding.

    https://www.mutualfundobserver.com/discuss/discussion/59731/many-lc-growth-funds-are-nondiversified
  • msf
    edited August 2023
    TRBCX has 7.49% of its assets invested in Alphabet stock (6.192% in class C, 1.297% in class A).

    This matters because in order to be taxed as a passthrough entity (i.e. the fund itself doesn't pay taxes), it must limit the size of its positions in companies (not share classes). Add up all the companies where it has more than 5% invested and this must total not more than 50% of the fund's assets.

    https://www.faegredrinker.com/en/insights/publications/2020/3/asset-diversification-test-a-timely-refresher

    TRBCX comes fairly close:
    13.998% (Microsoft) + 11.298% (Apple) + 7.695% (Amazon) + 7.489% (Alphabet) + 5.917% (Nvidia) = 46.497%.

    https://individual.troweprice.com/staticFiles/gcFiles/pdf/phbcgq2.pdf

    Meta is at 4.961%. If it goes over 5% (so that it is added in) and these other percentages don't shift, TRBCX might be in violation of the 50% limit (depending on how it got there).
  • Old_JoeOld_Joe
    I can't believe that any one guy can know so much about so many things as msf. I'm beginning to wonder if maybe he's really an advanced model of AI.
  • msf
    Sometimes you just get lucky. I wouldn't have known about the Internal Revenue rule except that it was in the news just last month. The NASDAQ 100 was "rebalanced" ostensibly to be more diversified. Since this was triggered by large holdings approaching 50% of the total value, I checked into what was magical about 50%.

    See also John Rekenthaler's piece, Why the Nasdaq-100 is Not an Index
    https://www.morningstar.com/funds/nasdaq-100-is-not-an-index
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