If Your Best Stock Winners Get Too Big, Is Rebalancing a Must?

In the category of "great problems to have," this is one that most investors would envy. Some years back -- based on the numbers, looks like 2010, 2011 -- a Motley Fool follower took some good advice, and invested a large amount of money in his Roth IRA into two stocks: Microsoft (MSFT 1.82%) and Amazon (AMZN 3.43%). The first has almost quadrupled since then, while the second has soared to around nine times his purchase price. Good news: Between them, those holdings alone have pushed his portfolio above $1 million. But inevitably, big winners like that mean that whatever asset allocation balance you originally had aimed for is right out the window.

In this segment from Motley Fool Answers, host Alison Southwick is joined by senior analyst Jason Moser and Motley Fool Wealth Management's Ross Anderson to address the hard question. How big a share of your portfolio should you let a winner grow to before you start selling it and rebalancing -- especially when you can see your target retirement date looming in the distance?

A full transcript follows the video.

This video was recorded on Nov. 27, 2018.

Alison Southwick: The next question comes from Twitter and it comes from Joe. "Thanks for giving me a hot tip. I had cash in my Roth and bought 500 shares of Amazon at $185. Now, along with 3,000 of Microsoft at $30 should I diversify or hang tough? I have 13 years to retire. Aloha! Joe from Hawaii." Aloha, Joe!

Jason Moser: Aloha, indeed, because at those prices, Joe, you're sitting on some very nice gains and I...

Southwick: I think we need to go see him in person to answer this question. To really give it the attention it needs.

Moser: And he'd probably fly us all out there.

Southwick: Thank you, Joe! We look forward to receiving our tickets in the mail.

Moser: This is a question that everyone has to answer [individually]. We often talk about buying and selling and when the best time to sell is. All sorts of reasons to sell. Either your thesis is busted, the company's not working out for you, or it's just been a bad investment. Or perhaps you need the money for something else. Perhaps you feel like the money is better allocated somewhere else.

Or perhaps, as it could be in Joe's case, given what we know based on the information he's given us, it's possible that he may be losing a little sleep at night thinking, "Wow! I've got a lot of money, now, allocated to these two individual companies."

Now, I can't tell from this email or from this tweet how much this makes up of his overall investment portfolio, but I'd venture that it's somewhat significant. In that case, I'd probably look at maybe spreading that money around a little bit. Usually when it comes to IRAs -- I realize everyone's tax situation is unique -- you can buy and sell and you're not going to have to worry about tax implications there.

I feel like with that type of gain, it probably is worth looking at spreading that money around a little bit, and the reason why I say that for Joe is because not only is he saying he has 13 years to retire, but he's actually saying retire. And I mean a lot of people out there are gunning for retirement. They have that in their minds. When I think about retirement it's a bit more abstract. I'm not necessarily wanting to quit my work anytime soon, so my investment decisions are a little bit different.

But when you're looking at that it might be time to start focusing a little bit more on protecting your wealth. Maybe take some money off the table there and put them into some lower-risk investments. Perhaps some dividend-style investments because Amazon is clearly a growth story. Microsoft a little bit less so, but it's a big tech company, nonetheless. I would definitely look at spreading that out.

Southwick: Ross, you probably get questions like this a lot.

Ross Anderson: I do. I was actually going to ask Jason what his threshold is. When you see a single position in a portfolio, where do you start getting uncomfortable?

Moser: This is where I would say "do as I say and not as I do," because I think I have a much higher risk tolerance than most people out there, and a part of that is because of the nature of my job. I mean, I've had a position at 40% of my portfolio before, and it didn't really cause me any concern. Again, I knew what I was doing.

Anderson: And you don't feel like you're 13 years from retirement.

Moser: I am not 13 years from retirement. I told David Gardner personally that I will work here until he kicks me out of here. So hopefully that's never, and while knocking on 46, here, I think I still have a number of years left to contribute.

For a lot of people, I think 20% is that number. They think, "20% -- whoa! That's where I'm starting to lose sleep." I think that number is different for everyone and it depends on your age, too. If you're in that stage where you're growing your wealth at 20, 30, to 40 years old vs. 50 to 60, maybe you're focusing on protecting your wealth. That's where you have to make an assessment. Like I said, it's going to be different for everyone, but I think given what we know, here, based on the math, that's a pretty big position in both of those companies and it'd probably be worth looking at spreading that risk around a little bit.

Anderson: The final thing I'll say on it is I would do the math personally and say that if the company lost half its value -- if you chopped it in half -- would that change your plans? And if it would, it's probably too much risk for you.