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How Much Is Too Much Invested in One Stock?

By Brian Withers and Jason Hall - Feb 2, 2021 at 7:00AM

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Short answer: It depends.

Investors love it when one of their stock grows to be a big winner. But when the size of that position grows bigger than any other stock, it could cause investors to lose sleep at night.

How big is too big? Like many things in investing, the answer is, "It depends." In this video clip from a Jan. 14 Motley Fool Live episode, contributors Jason Hall and Brian Withers discuss what to think about when one of your stocks becomes an oversized portion of your portfolio.

Jason Hall: Fool in a Cornfield says, "Heard a lot of people saying to have 15% in the stock, should they trim it? You guys always say, 'if you're sleeping at night, don't worry about it.'" He's pointed out Sea Limited (SE 2.90%) makes up a third of his brokerage account. Sleeps at night like a log. Don't worry about it. I also have a pension and a 401(k). Am I crazy?

Again, this is the way I think about it. I invert it: The Munger principle. There is that philosophical, does it keep you up at night? That is a really important trigger to start there. But the inverted thing is thinking about what are the real-world implications for you if that stock does fall? If the real-world implications are, I'm a long time from needing that equity, then yeah, and you still see great prospects for that business. Like Sea Limited, that's tiny compared to the addressable market that it could eventually grow into. That's the thing.

But, if you sleep well at night, but you're 65 and you're retiring next year, and that 33% of your portfolio, if it fell to 15 or 20% would financially harm you, then that's a different conversation you have to have. That's why I think inverting, it's a good idea. Brian? It's the art and the science, right?

Brian Withers: Yeah. I've had positions go up to 25-ish [percent] range. That point in my portfolio is continuing to add new money. That's diluting that top position by adding new money in. Today, if something got that large, I would think a little bit about it, depending on what it is. It absolutely depends on when I do need that money and what account it's in as well. I have money spread across my brokerage account, an IRA account, and a Roth, which gives me tremendous tax flexibility on how we want to do it. You have to be 59 and a half before you withdraw from IRA or Roth. I'm still five-plus years away from that. That's an important consideration.

Hall: One more thing on that too is there's also a very different consideration if Sea Limited's 33% of your portfolio when you're 65 than 33% of your portfolio when you're 35. Sometimes the best way to reduce your exposure to a stock is just to buy a bunch of other stocks. I think if you're young and your portfolio is still small, it's a lot less important to worry about your exposure to a company because if you trim it, and you're going to invest a half a million dollars in cash over the next 20 years, then it's nuts to cut your exposure to that company. I think that's important to remember, too.

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