At What Point Does an Individual Stock Become Too Big a Percentage of Your Portfolio?

Over time, some high-growth stocks can far outpace the returns of other companies. As a result, one of these individual stocks could become a very large position in your portfolio -- perhaps 10% or more of your total account. When should you sell and reinvest it? A lot has to do with your comfort level and having the proper expectations. In this Motley Fool Live video segment from The Five, Motley Fool contributors Jason Hall, Toby Bordelon, and Nicholas Rossolillo discuss how to handle such a situation.

Jason Hall: I'm going to share Joey K's question, we were talking earlier about like that position sizing thing. I think this is good like just the thought process to have, talks about Shopify (SHOP -2.37%) has grown to over 10 percent of their portfolio despite consistently adding around it, says, "I'm just going to let it ride, but I don't know where my limit is because I haven't hit it yet." I think that's important, think about it in guidelines, and it's the art and the science. You'll know when you get to the point.

Toby Bordelon: You will. You'll start getting nervous. If you find yourself every day asking yourself whether this is too big then it's probably too big. You'll know when you get there and the other thing too, you write the one reason I don't like hard-and-fast aligns, at least for myself, is because it's going to vary from company to company, Joey K, Shopify, maybe you're comfortable at 10 percent with Shopify, maybe you're comfortable at 15 percent with Shopify, maybe you're not comfortable anywhere near that. Let's say you eliminated and it doubles overnight you like, whoa, maybe I want to back off on that a little bit. It's going to be different from company to company and I say just roll with that. It depends on how you understand the company and how cool you are with owning that business.

Hall: Yeah. Bhanu, I'm going to ask you just real quick, and then, Nick, I want you to weigh in there too. Get us your tax question in tomorrow I know you are a pretty regular viewer and that's one I just want to say four or five minutes talk about so if you can bring that back tomorrow, that'd be great. Nick, go ahead with your thoughts on that.

Nicholas Rossolillo: All I would add, I think that's correct about sizing of your positions, but just don't decide that it was too big of a position after a stock drops 50 percent, because it happens. Individual stocks draw down by big double-digits, it's totally normal. It's more normal than we like to think about. So just don't make that mistake where, I feel good about having 10 percent of my money in this company, it drops by a huge percentage, and then all of a sudden, you're like [laughs] that's too big of a position.

Hall: Focus on your timelines, your financial goals when those things will occur, and the quality of the business you own, and the rest will take care of itself. It really will.

Bordelon: I see your point, Nick, one of my previously larger holdings, Sam Adams (Boston Beer Company (SAM 2.52%)), is down about 60 percent from its high of this year, 60 percent. A company that makes beer. If a company like that can drop over 50 percent, then I guarantee you, one of these high-flying SaaS companies can do it really quickly too.

Hall: Go look at some of the biggest winning stocks over the past 30 years. Look at Amazon (AMZN -1.64%), look at Apple (AAPL 1.27%), look at Netflix (NFLX -3.92%), look at Alphabet (GOOGL 0.55%)(NASDAQ: GOOG), I guarantee that you will be able to find 3, 5, 10 times over the past 20 or 30 years where those companies lost half their value or more. It happens a lot more than you would think.