How much is too much in one stock?

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Kelly
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How much is too much in one stock?

Post by Kelly » Sun Sep 23, 2018 5:50 pm

Hi All

I just completed moving all of my in-laws funds from Wells Fargo to Vanguard. They are in their 80's with father in-law in cognitive decline. After re-working what I could without tax implications, they now hold a 50/50 portfolio (the bond fund fills their IRAs). One third of their savings is still in seventeen stocks within the taxable account. Some of these stocks represent from 1% to 4.5% of savings. How much is too much in one stock?

We can sell enough to get down to no more than 2% in any one stock (arbitrary number I came up with) for a tax bill of $6000 . To sell everything will add $11,000 to the tax bill. These sales would be over two tax years (according to the software this was the lowest bill vs. more years). The added bill is due to more social security being pulled into taxable income

The portfolio is about $700,000. Sales will be replaced with total US and Int'l index funds.

Thank you for any thoughts!

Kelly

awval999
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Re: How much is too much in one stock?

Post by awval999 » Sun Sep 23, 2018 5:59 pm

http://portfolios.morningstar.com/fund/ ... ings?t=SPX

SP500 Index:
1. Apple 4.33%
2. Microsoft 3.5%
3. Amazon 3.14%

I would probably try to trim down any stocks >4%.

If they are reasonable blue chip type stocks though I don't know if I would worry about 1% of portfolio stocks.

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vineviz
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Re: How much is too much in one stock?

Post by vineviz » Sun Sep 23, 2018 6:03 pm

I wouldn’t worry about any stock worth less than 5% of the total portfolio, unless maybe if you had more than two in the same industry or sector.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

delamer
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Re: How much is too much in one stock?

Post by delamer » Sun Sep 23, 2018 6:06 pm

vineviz wrote:
Sun Sep 23, 2018 6:03 pm
I wouldn’t worry about any stock worth less than 5% of the total portfolio, unless maybe if you had more than two in the same industry or sector.
I agree.

mpsz
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Re: How much is too much in one stock?

Post by mpsz » Sun Sep 23, 2018 6:08 pm

I personally would not have more than 10% of my total portfolio in individual stocks, and not more than 5% in any one individual stock.

Mike Scott
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Re: How much is too much in one stock?

Post by Mike Scott » Sun Sep 23, 2018 6:12 pm

Could you wait until you need withdrawals and then sell the individual stocks as needed? You don't have to do it all at once.

inbox788
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Re: How much is too much in one stock?

Post by inbox788 » Sun Sep 23, 2018 7:16 pm

It appears their individual stock portfolio is about 1/3 of their savings/investments. If that's $700k out of a $2M portfolio, and if it went to zero, I don't think it will change their retirement plans. Like others, I wouldn't be in a hurry to fix anything. And even if their total portfolio was $700k, the risk of 17 individual stocks with a max of 4.5% in any one concentration is diversified enough not to cause much concern.

In a diversified portfolio, if any one stock went to zero, it wouldn't be the end of the world. If you had 5% or 10% concentration, your portfolio will still be 90-95% intact. However, an even that takes a stock to zero that's not contained to that particular company (and many such events) will most likely be accompanied by sector or market chaos, so a 30-40% fall in equities that takes out your single stock will mean you'll suffer a 35-45% fall, and if you have multiple such risks, you may be down over 50%, and that's the big risk with too much concentration. And if you work and lose your job with that company, it's a triple whammy.

Personally, I wouldn't worry until the concentration of a single stock was more than 5-10% and even up to 20% (say one of those stocks is Amazon or Netflix), but that's if and only if the remaining portfolio is well diversified.

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grabiner
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Re: How much is too much in one stock?

Post by grabiner » Sun Sep 23, 2018 8:30 pm

Kelly wrote:
Sun Sep 23, 2018 5:50 pm
One third of their savings is still in seventeen stocks within the taxable account. Some of these stocks represent from 1% to 4.5% of savings. How much is too much in one stock?
I wouldn't be too worried about this for now, as long as the 17 stocks aren't mostly in the same industry; holding 1/3 of your portfolio in energy, or technology, is too risky. 5% in a single stock is a reasonable limit.

If they make large donations to charity, they can use the individual stocks for those donations. (However, this may not be the best deal in their situation; they can make Qualified Charitable Distributions from their IRAs instead, which are deducted from taxes even if they don't itemize deductions.)
Wiki David Grabiner

delamer
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Re: How much is too much in one stock?

Post by delamer » Sun Sep 23, 2018 10:26 pm

Another related thought —

I inherited a portfolio with quite a few individual stocks. One of the first actions that I took was to get rid of stocks with small positions (like less than $10,000), just to simplify the portfolio.

msk
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Re: How much is too much in one stock?

Post by msk » Sun Sep 23, 2018 10:44 pm

Depends on the stock, obviously. I had 50% in Berkshire Hathaway for 3 decades :mrgreen: I would not worry at all if no stock is over 20% provided that stock still looks attractive. I would worry if that stock is Amazon, huge runup and excessive optimism given its P/E ratio. But the market does not agree with me anyway. So I would duck down to below 10% but not strive to go below 5% while losing out in taxes.

Valuethinker
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Re: How much is too much in one stock?

Post by Valuethinker » Mon Sep 24, 2018 2:50 am

Kelly wrote:
Sun Sep 23, 2018 5:50 pm
Hi All

I just completed moving all of my in-laws funds from Wells Fargo to Vanguard. They are in their 80's with father in-law in cognitive decline. After re-working what I could without tax implications, they now hold a 50/50 portfolio (the bond fund fills their IRAs). One third of their savings is still in seventeen stocks within the taxable account. Some of these stocks represent from 1% to 4.5% of savings. How much is too much in one stock?

We can sell enough to get down to no more than 2% in any one stock (arbitrary number I came up with) for a tax bill of $6000 . To sell everything will add $11,000 to the tax bill. These sales would be over two tax years (according to the software this was the lowest bill vs. more years). The added bill is due to more social security being pulled into taxable income

The portfolio is about $700,000. Sales will be replaced with total US and Int'l index funds.

Thank you for any thoughts!

Kelly
I would sell all positions down to 2%. And also sell out any below 2% to 0%, if I could.

Here's why:

- your index funds will "double up" any large positions eg Apple Amazon

- there's a lot of specific risk in stocks. If one company goes bankrupt then you lose say 4% of the portfolio, that's half a year's return (in a good year) and then you compound that loss essentially forever. The Financial Crash proved that some of the largest most stable companies in America (GM, AIG, FNMA, FMAC etc.) could go down to effectively zero

- $6k of capital gains tax to pay does not strike me as that much on a $700k portfolio

- simplification - fewer holdings means fewer things to report for tax, fewer things to keep track of, fewer things to worry about

retiredjg
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Re: How much is too much in one stock?

Post by retiredjg » Mon Sep 24, 2018 7:31 am

Kelly wrote:
Sun Sep 23, 2018 5:50 pm
...they now hold a 50/50 portfolio (the bond fund fills their IRAs). One third of their savings is still in seventeen stocks within the taxable account.
What is the rest of the portfolio, the other 20% or so, invested in?

Some of these stocks represent from 1% to 4.5% of savings. How much is too much in one stock?
As mentioned by others, this is related to how diversified those stocks are. If 15- 20% of the portfolio is in tech stocks or energy stocks or health care, or any other one sector, that's too much. I'd be trimming those down and replacing with a broad index fund.

If those 17 stocks are well diversified and if the other ~20% in stocks is well diversified, I would not be in a rush. Maybe take all expenditures from one of the stocks that's at 4.5%. Maybe start trimming everything down to 4% or less this year, then 3.5% or less next year.

I don't see any point in getting rid of it all. Depending on how diversified the stock portion is, I think there might be some point in getting rid of some of it.

Valuethinker
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Re: How much is too much in one stock?

Post by Valuethinker » Mon Sep 24, 2018 7:58 am

retiredjg wrote:
Mon Sep 24, 2018 7:31 am
Kelly wrote:
Sun Sep 23, 2018 5:50 pm
...they now hold a 50/50 portfolio (the bond fund fills their IRAs). One third of their savings is still in seventeen stocks within the taxable account.
What is the rest of the portfolio, the other 20% or so, invested in?

Some of these stocks represent from 1% to 4.5% of savings. How much is too much in one stock?
As mentioned by others, this is related to how diversified those stocks are. If 15- 20% of the portfolio is in tech stocks or energy stocks or health care, or any other one sector, that's too much. I'd be trimming those down and replacing with a broad index fund.

If those 17 stocks are well diversified and if the other ~20% in stocks is well diversified, I would not be in a rush. Maybe take all expenditures from one of the stocks that's at 4.5%. Maybe start trimming everything down to 4% or less this year, then 3.5% or less next year.

I don't see any point in getting rid of it all. Depending on how diversified the stock portion is, I think there might be some point in getting rid of some of it.
The evidence is that sectoral diversification does not save you -- even if you have the right percentages in the right sectors, it is stock performance that makes the big difference.

It's not that tech has done well, it is that the FAANGs have done well - Facebook Apple Amazon Netflix Google not Intel Cisco Oracle IBM (Microsoft has done pretty well on a total return basis).

You do get some sectors, like Energy, that tend to move together but even there there are marked differences in stock performance.

The problem is that the majority of returns have been made up of a relatively small number of stocks over time. If you happen not to have held those stocks you underperform by a lot. Similarly a corporate bankruptcy in your portfolio of say 20 stocks can kill 5% of returns, compounded for how ever many years you hold the stock.

So the risks of holding individual stocks are much greater than we realize: the risks of underperformance.

The OP is better to move to no individual stock holdings. Maybe over 2 years (down to 2% and then down to 0%). But not to wait around.
Last edited by Valuethinker on Mon Sep 24, 2018 8:49 am, edited 1 time in total.

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CyclingDuo
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Re: How much is too much in one stock?

Post by CyclingDuo » Mon Sep 24, 2018 7:59 am

Kelly wrote:
Sun Sep 23, 2018 5:50 pm
Hi All

I just completed moving all of my in-laws funds from Wells Fargo to Vanguard. They are in their 80's with father in-law in cognitive decline. After re-working what I could without tax implications, they now hold a 50/50 portfolio (the bond fund fills their IRAs). One third of their savings is still in seventeen stocks within the taxable account. Some of these stocks represent from 1% to 4.5% of savings. How much is too much in one stock?

We can sell enough to get down to no more than 2% in any one stock (arbitrary number I came up with) for a tax bill of $6000 . To sell everything will add $11,000 to the tax bill. These sales would be over two tax years (according to the software this was the lowest bill vs. more years). The added bill is due to more social security being pulled into taxable income

The portfolio is about $700,000. Sales will be replaced with total US and Int'l index funds.

Thank you for any thoughts!

Kelly
Probably too little to worry about at this point in their life journey. Are the 17 stocks in the taxable account dividend producing stocks? Are they currently - or have they been using the dividends to cover some of their expenses? It's important to understand the income stream and what would be impacted if you altered it any more than you already have.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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