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In reviewing our portfolio, I am finding that I have a couple of stocks that have performed very well over the years, and are now making up a bigger percentage of the portfolio than my other holdings. That's making me wonder if I should have a target maximum percentage that I keep any particular holding below so that I'm not exposed as much, but the other part of me wants to let the winners keep running.

So what do folks here do? Do you have some general guidelines you use in your portfolio such that one holding does not exceed some percentage? And what percentage do you use? I'm asking here because we are breathing on retirement, and so I want to be looking at this as part of that planning.

DH and I have been going back and forth on this, and so I'm curious what others do. I do have one stock that is about 10% of my portfolio, and given how many things are in there between taxable accounts, IRA accounts, and even my portion of the investment club, that is starting to feel high. But it obviously got there because it has done well over the years, and the numbers are still looking good.

Any thoughts from the folks here? I thought perhaps this would make a good topic for discussion to see how people arrive at their goals, and what goals different folks use.
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Target is not to have any one stock be more than 3% of your portfolio. Absolute max is 5%.

I had a buddy who had 50% in one company, which had been doing extremely well. Then it missed an earnings estimate and dropped --- and my buddy's retirement plan changed from "early" to "hopefully at 65".
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Interesting ... You made me look! 8^) At my portfolio in a way I've never done before.

I looked at the % each holding represents across all my holdings and found that I have no equity positions above 1% of the total portfolio. However if I look at the sub-portfolios, such as MDP, I see that I have several positions close to 10% of my MDP holdings.

Unfortunately, in the past I think that I have made some MDP sell decisions based upon its MDP portfolio size rather than the risk of such a smallish % of my overall holdings. I say unfortunately because I have a hard time not selling larger positions to at least recover my initial cost basis (holdings are in an IRA) to protect myself from a loss. But experience shows that that has been the wrong thing to do as I should have let those winning positions run.

So, I think that if, like you, I had an equity that represented 20% of my overall portfolio, I know that I would not be able to resist selling down to a smaller position. (In my case 5% would represent my tolerance for risk.) But in the future, I'll be sure to sell MDP positions based on my overall portfolio. So then a 20% MDP position would be fine.

Hopefully, I'll get to celebrate one of those large positions in the not to distant future.
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You definitely keep better track than me although I plan to do better. For me, it's not always the % of portfolio. It's often when I see the percent change in a particular holding.

I have a couple of strategies depending on circumstances. If it will be a heavy work/travel period or I will be out of the country, I will put in trailing stops. Another is selling half when something has doubled. Sometimes it's just watchful waiting. One other factor is if I am fully invested and something else looks promising.
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When I was a more active investor, I allowed a stock to take no more than 5% of our portfolio. Any time I would get tempted to let a winner ride, I thought of Enron. Sometimes things look really good...until all the sudden they don't. How does the saying go? "Bulls and bears make money, hogs get slaughtered. ???

IP
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Rayvt: "Target is not to have any one stock be more than 3% of your portfolio. Absolute max is 5%."

I am surprised you use 3%.

I prefer a 5% individual cap and might let ift drift somewhat higher if it was fundamentally sound, but not more than 8%.

I also consider from the view of portfolio diversification. A 5% cap then requires at least 20 different positions, which is enough to diverisfy if chosen carefully.

At 8%, that would really be 12-13 positions, which is getting too small to properly diverify.

At 20%, that might be no more than 5 positions, which is a cvery concentrated portfolio and impossible to properly diversify.

Regards, JAFO
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I think its important to rebalance by sector and by individual stock from time to time.

I do have a jumbo category that allows certain well managed stocks to go a bit longer.

But you don't necessarily have to sell them. Just trim your holdings and diversify.
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For the future, make up some "rules" that you will follow, that you are comfortable with, and then follow them. Make the rules now while you are not under "duress". More likely to be logical and easier to follow when the time comes.

FWIW, I have 16 stocks so each position is about 6.5%. Each quarter I look at rebalancing. If a stock gets to about 8% of the portfolio or 20% over what it should be, I'll sell to get it back down to normal.

JLC
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FWIW, I have 16 stocks so each position is about 6.5%. Each quarter I look at rebalancing. If a stock gets to about 8% of the portfolio or 20% over what it should be, I'll sell to get it back down to normal.


I think a lot depends on the size of your portfolio.

A $10,000 portfolio you're probably in only about 5 stocks. $2000 ea. 20% each

A $100,000 portfolio you wouldn't have just 5 stocks. You'd have maybe $5000-$10000 in each stock, or 10-20 stocks.

A $1,000,000 portfolio you'd be using more than one strategy, so you'd have maybe $200K-$400K in each strategy. $10K-$50K worth of each stock, so around 40-60 stocks total.

A $10,000,000 portfolio --- $2M in BRK, $4M in VT, $3M in BND, and $1M in cash walking-around money.
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pauleckler: "But you don't necessarily have to sell them. Just trim your holdings and diversify."

How does one "trim" holdings without "selling"?

Curiously, JAFO
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No, I concentrate my holdings.

I have about 95% in AAPL, some of that in AAPL options. That approach made me most of my money, it allowed me to retire early, and I see no reason to change. I do not recommend this approach to anybody else, but I'm happy with it.

-IGU-
(just want to speak up for the non-cautious side)
(and yes, my AAPL holdings are down about 40% from their peak a year and a half ago; no big deal)
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As this thread shows, there are almost as many opinions as people. The risk can be simply stated - if the large holding goes south, you portfolio will be hurt.

I give just one example - Yesterday Microsoft set a new 10 year high $40.72 -- The problem is the stock was in the high 60s in 1999. To put the current price in perspective, until MSFT announced they were getting a new CEO last August the stock price was basically $30.

So how will you and DH feel if the stock looses 50% of its value in next 4 to 6 months? Microsoft is certainly a good, viable company - so it is not just crappy companies that have such issues.
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First of all, there is no excuse for holding a stock that goes down 40%, or even close. You should monitor your holdings carefully, and sell when something begins to decline. The 21 day EMA is a good guide. If it is above its 21 day EMA is is probably good, unless you think it is way too extended. Of course, if it goes down 40% in one day, you are pretty much out of luck.

So far as a % of portfolio is concerned, it really depends on how much money you have. A good rule that some have is about $10,000 per stock at least, and (if possible) at least 10 stocks.
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How does one "trim" holdings without "selling"?

I meant sell some, not all.
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Personally, I look at how diversified the undelying company is. Examples are holding company like BRK-A/B, LOW; internationals with a wide variety of markets like JNJ, KO, PG; or critical essentials like oil companies or staple goods.

Specialists and one-trick-ponies frequently get reviewed, but not always adjusted. It depends on what I think will happen to their customer base or evolutionary trends. So this includes Starbucks, Apple,

But would I allow any single stock to approach 30%, probably not. But that is only set in very wet beach sand.
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2gifts asks,

DH and I have been going back and forth on this, and so I'm curious what others do. I do have one stock that is about 10% of my portfolio, and given how many things are in there between taxable accounts, IRA accounts, and even my portion of the investment club, that is starting to feel high.

My rule of thumb is to only have as much of your portfolio in one stock that you could afford to lose (i.e., if you could survive at most a "permanent" 25% drop in your portfolio without affecting your lifestyle in retirement, then 25% is the most I'd put in one stock.

Of course, I "grew up" working for Exxon where it wasn't uncommon to see work-a-day engineers retire with $3 or $4 million in company stock because they maxed out their 40lk with 100% stock and never sold a share in the last 40 years. I guess that works with Exxon and Berkshire Hathaway -- Enron, not so much.

intercst
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Rayvt is very correct, IMO - Size matters. Also consider of how much you can actively manage. Depending on you investment strategy, actively managing 12-15 shares can be a handful. If you are a long-term holder and not so active with your investments then you could probably handle triple that amount.
Risk mitigation is important too. How much capital do you trust to any one holding (set your own limit)? Eventually as the dollar amount of your portfolio grows there will be a struggle over what you can actively manage yourself and the amount of risk you are willing to take with each holding.
At that particular break point, I would think you would start going into diversified funds to shoulder off some of the management responsibilities, although less work usually equates to less gain.
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^^ managing 12-15 shares ^^

I meant 12-15 stocks or holdings... no dang edit button.
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Hi 2gifts!

As Warren Buffett says, diversification is insurance against ignorance...and compared to the WEB's of the world, I am "ignorant";
thus, no more than 5% in any one stock and no more than 20% in any one sector.

Does this limit my returns a bit? Maybe.

But then, I not trying to "maximize my returns" or beat the S&P 500 by "X"%; rather I'm trying to generate the returns needed to fund 100% of my inflation-adjusted long-term financial plan ( reviewed/revised annually), with the least risk ( "risk" being defined for me as the probability of running out of money before I die ).

Also, a more diversified portfolio allows me to sleep well at night. ;-)

Cheers!
Murph
Home Fool
Different investing strokes, for different investing folks....with different financial circumstances, goals and risk tolerances
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