Imagine your good fortune when checking portfolio balances and you notice that the value of a single stock holding in your portfolio has increased in value by more than an entire year of income! ‘Impossible!’ you say? Not so! At Carnegie, we have witnessed this happy situation more than once over the years.
In several cases this year, clients have experienced spectacular appreciation of the stock holdings and their stock options from their employer. The appreciation has been so dramatic that in just six months, the market value of their company holdings went from less than five percent of their Carnegie portfolio value to over fifty percent of their total net worth.
Sounds awesome, right? The fabled unicorn! But when does a very good thing become too much? In other words, when does a portfolio become too concentrated, or too dependent, on the performance of just one stock … or just a few holdings?
The scenario above recalls the adage that ‘portfolio concentration aims to build wealth, while diversification strives to preserve wealth.’
This applies to the broader stock market as well. NVIDIA is on the cusp of becoming the first company to be valued at 5 trillion dollars. With just seven companies in the S&P500 accounting for over +40% of its value, the S&P500 index is more concentrated today than it was in the early 1970s…it is less diversified today than 50 years ago!
Experiences from the Great Financial Crisis and the 2000 Tech Bubble suggest that now may be a very good time to revisit and deploy some time-tested diversification concepts. Examples abound from prior periods of broken tech holdings and dashed dreams from overexposure to single company stock positions.
The technical term for assessing and measuring diversification is portfolio concentration, and there are accepted statistical ways to measure this concentration. In practical terms, if you wake up every day and go to sleep every night worried about just one or two holdings…your wealth is probably too concentrated!
Another simple, measurable way to manage portfolio concentration is to make sure no single stock investment accounts for more than 10% of your net worth. It is a pretty good rule of thumb, but it does not apply the same for everyone. The right level of concentration is best sorted out between you and your Carnegie portfolio manager.
A large gain in a concentrated stock position is certainly a good problem to have…but what are some ways to handle large unrealized taxable gains? How can portfolio rebalancing be accomplished tax-efficiently? To figure out the right approach for you, we suggest coordinating with your Carnegie portfolio manager and your tax professional.
Portfolios that have held holdings like Apple, Microsoft, Nvidia, Amazon, Google, or Meta for many years likely have accumulated very large gains. The following list suggests some common approaches that you might consider to proactively adjust exposure in these cases:
The goal of these approaches is to reduce portfolio concentration and reduce taxes. There are other techniques that may be used to address specific situations.
There is no such thing as a perfect portfolio. The right approach for your situation is the one that properly balances the goal to build your wealth through concentration with the desire to preserve your wealth with diversification.
To discuss your investment portfolio, call Carnegie Investment Counsel at 800-321-2322 or email info@carnegieinvest.com.
For informational and educational purposes only. The information is not intended to provide specific advice or recommendations. As mentioned, planning techniques and strategies referenced may not be suitable for everyone as they do not take into account personal, financial, or tax considerations specific to your circumstances. Please consult with tax, legal, and financial advisors as laws and interpretations are subject to change.
Carnegie Investment Counsel (“Carnegie”) is a registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. For a more detailed discussion about Carnegie’s investment advisory services and fees, please view our Form ADV and Form CRS by visiting: https://adviserinfo.sec.gov/firm/summary/150488.