Concentration Matters

Q At what point does a portfolio have too many shares of one stock?

— G.R., Mobile, Ala.

A First, think in terms of total value, not number of shares. You might have 2,000 shares of one stock, worth a total of $4,000, and 100 shares of another stock, worth $7,000. Focus on the percentage of your portfolio that each stock represents.

If one of your holdings represents 50 percent of your entire portfolio, for example, that's 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 represents just 2 percent of your portfolio, that's not ideal, either. If that stock doubles or triples, its overall effect will be small.

For most people, eight to 15 stocks is a good number of holdings to aim for. You want some diversification, but you don't want more companies than you can follow. When one holding grows to become too big a chunk of your portfolio — perhaps 15 to 30 percent — consider selling off some of it.

Q I own stock in several companies. One has lost value, one is about the same after 10 years, and a few have done well. I need to pay my son's college tuition now, so which stocks do I sell first?

— H.H., Tulsa, Okla.

A First, forget how the stocks have done in the past. What matters is each company's future. Try ranking them by how much confidence you have in their health and growth prospects. Sell the ones in which you have the least faith. Your money should always be concentrated on your best ideas.

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