# How much of one stock should you hold? Facts and frameworks to help you decide when to diversify away from a single stock. [Srikanth Narayan](/content/author/srikanth-narayan/index.html) Founder and CEO ## Times have been good As of August 2024, the Nasdaq-100 has grown by over 1500% in the past 15 years. It’s been one of the greatest bull runs in stock market history. That means many individual stocks have been doing well, but some companies have grown explosively – and not just the Mag Seven tech stocks. For example: - Arista Networks is up over 18X - AMD is up over 35X - The Trade Desk is up almost 30X - Even companies like Eli Lilly, Costco, and United Healthcare are all up over 15X _These examples are for illustrative purposes only and are not recommendations to buy any security. Returns for Arista Networks and The Trade Desk are calculated from their inception dates, as they were not publicly traded in 2009._ Disruptive technologies and business models have driven most of this growth. Mobile and cloud computing have dramatically increased the reach of technology, for example. The recent rise of AI (and the chips to deliver it) and the development of more innovative business models around software delivery have also had outsized impacts. Whatever caused the growth of a particular company, the result has probably been good for you if you’re reading this article. While your net worth has grown on the back of one or two stocks, it also means your risk has grown. ## Market risks versus business risks In our complex global economy, we never know where the markets will be a month from now. Just in the past five years, we saw Covid-19 ravage the markets over the course of a few weeks. We also saw inflation drive interest rates higher, leading to a banking crisis in 2023. And in the past few months, attempts to unravel a [Japanese currency gambit](https://www.cnn.com/2024/08/07/business/yen-carry-trade-stocks-nightcap/index.html) caused a worldwide market correction. While the risk of loss exists with any diversified investment, it’s significantly higher when concentrated in a single stock. For instance, the 2023 banking crisis, which caused only a modest drop in market indices, proved devastating for individual stocks like Silicon Valley Bank, Signature Bank, and First Republic. Deciding when and how to sell is ultimately a subjective decision, but moving your portfolio from dependence on a single stock to a more diversified allocation objectively reduces your risk. And given how well the markets have done, a diversified portfolio would have outperformed most individual stocks over the past 20+ years: ### Individual Stocks vs. Nasdaq-100 _2001 to 2023_ Source: Cache, Bloomberg This analysis is based on the returns of individual stocks in the Nasdaq-100 index from January 1, 2001, through September 25, 2023. Our analysis includes securities with different lifetimes in the index since securities are added and removed from the Nasdaq-100 over time. For the purposes of comparison, each security’s return is measured over its lifetime in the index. ## So, how much of one stock is too much? The conventional wisdom is that you’re exposed to concentration risk when you hold more than 10% of your portfolio in a single stock. As a concentrated position grows beyond 10% of your portfolio, the risk you’re exposed to increases quickly. Here’s the informal scale we use internally to describe levels of concentrated positions: - 10% to 25%: Pushing your luck - 25 to 50%: Tempting fate - 50 to 75%: Paying with fire - 75% to 100%: Going #YOLO To calculate your concentration risk, just divide the value of your stocks in a company by the value of your overall investment portfolio. It sounds simple, but there can be a few wrinkles to consider. First, make sure to include all your retirement accounts. Also, keep in mind that there can be hidden concentration in some of the ETFs or other investments you hold. At the time of writing, for example, Apple, Nvidia, and Microsoft each make up more than 8% of the Nasdaq-100 index (NDX). If your portfolio was 97% NDX and 3% Apple, it would look diversified, but it would be on the verge of overconcentration. If you want to dive deeper into these calculations, [EquityFTW has a nice overview](https://www.equityftw.com/articles/how-much-company-stock-is-too-much). ## When to the buck conventional wisdom When you hold a position that continues to outperform, it might not feel like you’re holding too much stock. In fact, you may wish that you had more! Whether you have too much of one stock is ultimately a subjective decision, but there are a few guardrails you ought to consider. For example, you should probably make sure you’re taking care of basic needs before gambling on a concentrated position. Here are a few questions to ask yourself: 1. **Are you in debt?** Do you have obligations that could drag down your future growth? Could debt become overwhelming if your concentrated position doesn’t pay off? The higher the interest rates you’re paying, the more important it is to pay off debts before taking on additional risk. 2. **Do you have major expenses in the near future?** From a down payment on a house to paying for kids’ college, you may want to take enough off the table to make sure you won’t have to miss out on any major milestones. 3. **Do you work at the company?** If you’re concentrated in the company that’s also responsible for your salary, there are two reasons to think about limiting your exposure: First, you’ll probably be earning more of this stock as your RSUs vest; and second, the potential loss of income exposes you to a second type of risk. 4. **Do you have taxes to cover?** Capital gains taxes can run up quickly when you liquidate highly appreciated stocks. Additionally, you might have a looming tax bill when RSUs vest, or if you go through an IPO. You’ll likely want to make sure these expenses are covered before going long on a stock. We have a detailed [guide for managing RSUs](/content/companion/when-to-sell-rsu-stock/index.html), if it helps. ## One final consideration By now, you’re probably leaning one way or another. A factor that may tip the scales for you is how close you are to retirement. When you’re younger, taking more risk is generally more acceptable because you have more time to recoup any losses. When you’re older – or close to giving up regular employment – it can be harder to recover from a loss. One major drawdown in a concentrated position can change your outlook significantly, and it can undo years of hard work, savings, and good fortune. Keep in mind that diversifying doesn’t mean giving up on growth. When you have too much of one stock, spreading out your risk also means gaining new opportunities for growth. ### Look for tax-advantaged strategies If you decide it’s time to diversify, there may be better ways to do it selling your stocks outright. Selling stocks triggers capital gains taxes, which means it can gobble up a third or more of your principal if your stocks are highly appreciated. Before you log in and hit “sell,” make sure to understand your other options. I started this company because I thought [exchange funds](/content/companion/what-is-an-exchange-fund/index.html) – which allow you to diversify immediately while deferring capital gains – were inaccessible and poorly understood. Let’s say you held $1M of Apple stock, with a cost basis of $100K. Here’s how an exchange fund would compare to diversifying and selling if you received a similar rate of return: Hypothetical illustration assuming a 10.7 gross, 10.0% net annual rate of return. Investors should consider their own investment time horizon and tax bracket when making investment decisions. [Try your own scenario](/content/companion/exchange-fund-tax-benefit-calculator/index.html) with our exchange fund calculator, or take a closer look at [The Cache Exchange Fund](/content/product/exchange-funds/index.html).