Is 20% in one stock too much?

Work it backwards. At 20%, a fall of half in that stock costs the portfolio 10%. If a 10% hit from one company is more than you would accept, the position is too large for you. The answer changes if the stock is your employer, since your income is exposed to the same company.

Should you sell a stock that has grown into a large position?

A position that grows past your cap raises the same risk as one bought too large. A trimming rule set in advance, such as cutting back to the cap once it passes a higher trigger, handles it without a fresh debate each time. Check the tax cost first in a taxable account.

How Much of Your Portfolio Should One Stock Be?

Q: How Much of Your Portfolio Should One Stock Be?

No single percentage fits everyone. Work backwards from the loss you could accept if the stock halved: if a 50% fall should cost no more than 5% of the portfolio, cap the stock at 10%. Count employer stock toward that cap and set a rule for trimming winners that grow past it.

Your largest holding just passed a fifth of the account. Does that matter? Exactly as much as a bad year for that one company would. Rules of thumb that hand everybody the same figure skip the part that belongs to you, which is how much damage you’re willing to take from a single name before the portfolio stops doing the job you built it for, whether that job is a house deposit in five years or an income in retirement.

Start from the loss, then find the cap

Pick two numbers. First, a realistic fall for one stock. Halving is a sensible working figure, because single companies can lose half their value after a failed product, a lost customer or a debt problem, and none of those shows up on the quote page in advance. Second, the most that one such fall should cost the whole portfolio.

Say you choose 5% as that limit.

At 10%, a halving costs 5%. At 20%, it costs 10%. Divide the portfolio loss you accept by the fall you assume and you have the cap; the position concentration calculator does it for any pair.

What if the stock is riskier than that?

Change the assumed fall. Some names can drop further than half. Think of a small company burning cash, or a drug developer waiting on one trial. Assume an 80% fall and keep the 5% limit.

Riskier name, smaller cap. A large, steady business might justify a milder assumption. Be careful there, since the exercise exists to plan for the bad case and it is easy to talk yourself into a gentle one about a company you like.

What does it look like in dollars?

Take a hypothetical $80,000 portfolio. One stock is worth $16,000, or 20%. If it halves, you lose $8,000. That is 10% of everything, from one company. At the 10% cap the same stock would be an $8,000 position. A halving would then cost $4,000, or 5%.

Dollars make it concrete. Ask how many months of saving $8,000 represents.

Does employer stock change the answer?

It does. Working for the company means your salary, your bonus and possibly your retirement plan already depend on it. A bad year for the business can cut the share price and your income together. In the worst case, the layoff and the price collapse arrive together. So count stock grants, share purchase plans and any company stock inside a retirement plan as one position, and set its cap lower than you would for a stock you merely own.

When a winner grows past the cap

Caps get broken from the inside. Suppose a 10% position doubles while the rest stays flat. It ends up near 18% of the portfolio. Nobody bought a share. Without a rule, the usual response is to admire it.

Set the trimming rule before it’s needed. One version: when a position passes 15%, cut it back to 10%. The gap between the trigger and the target is deliberate. Trimming the moment a stock ticks over 10% would mean a string of small sales, each with its own trading cost and possibly its own tax bill, for very little change in risk.

The portfolio is still worth $100,000. The stock is back to 10%. In a taxable account the sale may realize a gain, so check the tax cost, and consider sending new deposits elsewhere first, which lowers the weight without a sale; tax situations differ from one account to the next.

Is an index fund concentrated too?

It can be. A market-weighted index gives the biggest companies the biggest weights. A handful of names can end up as a large slice of the fund. Hold that fund and the same large companies directly, and the exposure stacks on top of itself.

The cap said 10%. The real figure is 13%, and a halving now costs 6.5% of the portfolio instead of 5%, which is a larger hit than the limit you chose at the start, and one you’d only discover by opening the fund’s holdings list and doing the multiplication yourself. The argument is made in your index fund has a concentration problem too. An equal-weight index is one way to spread it.

Add the fund’s holdings to your own list before you measure. For sizing across a whole portfolio, the position sizing for investors lesson goes step by step, and the investing hub collects the related pages.