For many investors who have been in the game for at least a few years, a common problem is position sizing. A successful company stock could grow into a very large percentage of your portfolio or net worth. Should you let it ride to continue compounding your investment return, or sell some and diversify? Fool.com contributors Jason Hall, Toby Bordelon, and Nicholas Rossolillo discuss this situation in the Motley Fool Live segment from "The Five" recorded on Sept. 15.
Jason Hall: Bhanu has a couple of questions in here. The first one, I like. Nick, this is this is one that -- there's a lot of fun that we get every so often because we get to share a little bit of our individual approach and insight. So this is never direct advice to any of our viewers, but it's a good way for Fools to see how other Fools invest and the approach that they take.
So the question -- share your thesis on your percentage allocation in your portfolio, and offer some examples. Like if a stock you own is 5% of your portfolio in gross to 8% and is winning and you anticipate continuing to win, do you continue to add to your winners? Or do you diversify to other recommendations and open a new position and build on it? I think a good way we can approach this is if we can just each share, maybe, our individual strategy about how we think about diversification of portfolios, positioned sizing, and what's, like, your level of comfort? That sort of thing. Adding to your winners versus buying stocks you don't necessarily already own. Nick, you want to kick us off for a minute here?
Nick Rossolillo: That's a tough question to answer briefly.
Hall: It's fun, because it's going to be three different answers. That's the cool thing about it.
Rossolillo: [laughs] I would say for me it depends on the situation. One thing does come to mind, though. Apple (AAPL +1.18%) grew to larger than a 5% position for me a few years ago -- much, much larger than 5% when I was also considering that as part of some ETFs that I own. I made the decision to scale back to five percent on Apple, not because I thought Apple is done for with its growth story, but I just wanted to allocate some of that to some smaller, higher-growth businesses. If it's, like, a big business and it's still growing, still riding some great long-term secular trends, I have no problem having a 5% allocation to a bigger business like that. And if it dips below 5% over time because some of the smaller stocks catch up, I will add to it, again, like I've added to my Apple position in subsequent years. So it depends, but I will sell a larger business if I think there's smaller stocks out there that can outpace it.
Hall: It just depends. I think that's really important. Right, Toby?
Toby Bordelon: Yeah. I'm just thinking about this, because I've had companies that get to, like, 20% at some point. What we're asking specifically is if you own 5% and it grew to 8%. At 8%, personally, I would probably keep it going if I thought -- now, I don't know if I would add. I think now, I don't necessarily have a hard and fast rule, but I generally have not been adding to companies that are more than 5% of my portfolio. But I don't sell. The only company I've sold recently that grew large was Tesla (TSLA +2.40%), because I just had issues with valuation with the business generally. But that decision to sell wasn't like a "it's too big for my portfolio" decision. It was more business-driven. I don't honestly know where my limit would be on the upside if a company kept winning.
Hall: I think the key thing for this with me, guys, is it's too easy to fall into the precision fallacy trap here, where you define it too closely. Because frankly, I think this is a number that for most people should change over time.
Bordelon: Yeah, it's true. Because I mean -- I didn't want to interrupt you there. But the bigger your portfolio is relative to your needs, the less the return would have to be.
Hall: That's where the risk becomes compound.
Bordelon: Exactly. I mean, if I have a $10 million portfolio and I can be comfortable over more time with $1 million and I have one company that's 30%, if I love the company, whatever.
Hall: The other end of that barbell, if half your portfolio is in Zoom (ZM 3.65%) and you're 35 and it's your retirement money and you're going to be adding to it for 30 years, do you need to sell Zoom, or do you simply no longer invest more in that winner? That's when the decision -- maybe also you don't sell. Maybe you just need to buy other stocks.
Bordelon: Yeah. That's a good point, too, because it very much depends on whether you're adding money.
Hall: Well, it's the other extreme.
Bordelon: Yeah, right. Again, if you're 35, something that's 50% now, if it never grows again and I keep adding and adding, all of a sudden that becomes 40, 30, 20.
Hall: Something that Tom Gardner has said a few times that really resonates with me is, thinking about this, is thinking about in terms of net worth, not necessarily percentages of your portfolio. But for Tom, a number that he is specifically mentioned is, let's say you have a stock that's been a huge winner for you. It's been a great winner. And it gets to the point where now it's 20% of your net worth, and that's just an arbitrary number that Tom has used as the example. At some point, and this is what Nick was getting to, you have to start thinking about, even if it's a wonderful business, even if you think it could continue to make money outperform the markets, even if there's tax implications of selling, you have to take some tax hit there -- simply the downside risk to your financial future if things don't go well.
GE in 1999, right? Microsoft in 1999, right? Eighteen years, it took Microsoft to recoup that lost value. If you're somebody that bought Microsoft in '85, '86, and you put in $10,000 and you're sitting on a couple of million dollars in 2000, even though you think the company will continue to do well, it's no longer about the company. It's about thinking about the financial implications directly. And when it's 20% of your net worth, that's a lot bigger implication than whether it's 5% of your portfolio versus 8% of your portfolio. I think that putting it in the greater context of your wealth is one of the healthiest conversations you can have with yourself about portfolio sizing and diversification.
Bordelon: Right.
Rossolillo: I'd also add to Bhanu's question about affecting compounding. You don't just compound from holding onto that one single stock for forever. Even if it's, like, 20% of your portfolio, you can still get compounding growth if you downsize that position a bit and buy five new stocks, and one of those five goes onto be something great. Now you're still compounding your returns over time. That's exactly what I did with Apple a few years ago. One of the stocks I bought shortly after its IPO was CrowdStrike (CRWD 1.77%), which you pitched earlier, Jason. I haven't gotten that extra growth from Apple from that position that I sold. But you know what? I'm still compounding, because it's been reinvested somewhere else.
Hall: Yeah, absolutely. That's really important to have that context, that you're still compounding your capital, and that's really the financial goal here.
