How Much Is Too Much?

Q. How do you know if you have too much of your portfolio invested in one company’s stock?

--G.B., via e-mail

A. First, think in terms of total value, not number of shares. You might have 1,000 shares of one stock, worth $15,000, and 200 shares of another stock, worth $18,000. Don’t think that 1,000 shares is too much or that 200 is too little. Focus instead on the percentage of your portfolio that each stock represents. If one of your holdings represents 50% of your entire portfolio, for example, that’s probably too much risk for most people. If anything happens to that one holding, your portfolio will take a big hit. If you hold too many stocks, though, and your biggest holding amounts to just 3% of your portfolio, that’s not ideal, either. If that stock doubles or triples, its overall effect will be minimal.

For most people, eight to 15 stocks is a good number to shoot for. You want some diversification, but not too much. And you want only as many companies as you can follow. Offering contrary advice is Mark Twain, who said, “Put all your eggs in the one basket--and watch that basket.”