Concentration Risk: When Your Biggest Winner Becomes Your Greatest Liability

A recent episode of The Clark Howard Podcast featured a 45-year-old investor seeking advice on how to unwind a concentrated bet. The individual's portfolio held around a third of its value in Alphabet (NASDAQ:GOOGL | GOOGL Price Prediction), Apple (NASDAQ:AAPL), and Shopify (NASDAQ:SHOP). Wes Moss, the host of the show's Ask An Advisor segment, offered words of caution, saying 'your stock doesn't know your name.'

Moss emphasized that investors often become too attached to their largest positions, which are typically the ones that have grown the most. He posed a thought-provoking question: if you were starting from cash today, would you want 50% of your holdings sitting in two companies? Moss' point is that few people would say yes.

The math behind concentration risk matters more as investors approach needing their money. A large position can also lead to sequence risk, where a significant drawdown during the accumulation years is a paper cut compared to the same event in retirement. A concentrated winner delivers oversized returns on the way up and oversized damage on the way down.

Moss suggested running the 'bucket-of-cash test' by writing down your current allocation and asking whether you would rebuild it from scratch today at those weights. Any position you would not repurchase at today's price is a candidate for trimming. He also recommended trimming inside retirement accounts first, as this generates zero capital gains tax.

The three names carry very different risk profiles, with Apple trading around $317 and Alphabet at roughly $336. Shopify sits in a different risk bucket entirely, with shares near $147 and a beta of 2.59. Moss offered the framework for cutting a big winner without regret: 'anytime you see a stock that's up 4,000%, think about this: what's the likelihood it's going to be the biggest gainer in the market over the next five years? Pretty low probability.'

Moss' rule is not just limited to Shopify but also applies to other big winners. He pointed out that yesterday's best performer rarely repeats, and the odds of topping the market over another five-year run are slim.