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A Winning Stock Can Overwhelm Your Portfolio. Here's What to Do Next.

By Danny Vena - Jan 27, 2021 at 9:00AM

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There's no one-size-fits-all answer, but these guidelines can help.

The ultimate goal of investing has always been to identify best-in-breed companies, buy their stocks, and reap the rewards. Every once in a while, however, a stock far exceeds our vision of success. Now what? Many investors have been faced with the decision of paring back a successful stock or letting it become a dominant part of their portfolio.

On this episode of Fool Live that aired on Nov. 30, 2020, contributors Danny Vena and Brian Withers discuss what to do if one stock exceeds your wildest dreams and threatens to overwhelm your other holdings.

Danny Vena: I saw a question here, the one that resonates with me, and this is actually the second most upvoted question right now from Brett. It says, "If we follow Fool guidance and stick it out without selling to get the best returns from our big winners, some companies will be huge in your portfolio. No matter how small the starting position, a hundred-bagger will be overwhelmingly large. Is there Fool advice to trim to avoid overallocation?"

I think my portfolio is a great example of that. My position in Netflix (NFLX 1.90%) over the years and mind you, I've owned this since 2007, it has grown to 15% of my portfolio. It was actually more than that. There was one point where Netflix accounted for 20% of my portfolio.

The way that I deal with that is I consistently add to my portfolio on a monthly basis every time I get paid. Depending on what my pay schedule was, sometimes I would get paid every two weeks, and I made sure that the same amount of money from every single paycheck went directly into my investing account, and I added around those big winners. I added to what I thought was going to be the next big.

Over time, some of those positions have grown quite large, and some of them have not done anything at all. In fact, over the last few years, the growth of some of my other positions. MercadoLibre (MELI 8.36%) and Shopify (SHOP 5.47%) are two great examples. They have grown so much, they've actually decreased the amount of my Netflix percentage of my portfolio.

I'm comfortable with that. I don't recommend that everybody do what I do. I think folks need to do what can help them sleep at night.

But if you're comfortable with having one stock become a large part of your portfolio, I don't think there's any thing wrong with trimming small bits off of it. In fact, in the Phoenix 1 portfolio that I was a contributor to for a number of years. When you get into retirement, that's one of the strategies that the portfolio used, was taking your biggest winner and trimming a little bit off the top of those on a regular basis to build out your cash position or to live off of.

Brian Withers: Yeah, that's awesome, Danny. I appreciate your perspective.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$191.40 (1.90%) $3.57
Mercadolibre, Inc. Stock Quote
Mercadolibre, Inc.
$783.44 (8.36%) $60.44
Shopify Inc. Stock Quote
Shopify Inc.
$351.32 (5.47%) $18.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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