Concentration Risk: Why Your Biggest Winner Can Be Your Biggest Risk

A recent episode of The Clark Howard Podcast featured a 45-year-old Florida state employee who asked how to unwind a concentrated bet in their portfolio. The individual had about a third of their million-dollar investment riding on Alphabet (GOOGL), Apple (AAPL), and Shopify (SHOP), with the Shopify shares carrying large capital gains in a taxable account.

Wes Moss, the host's advisor, offered some sage advice: 'You may know your stock's name, but your stock doesn't know your name.' He emphasized that it's essential to look at a portfolio as just a bucket of cash and not get emotionally attached to individual stocks. Moss pointed out that concentration risk is often behavioral before it becomes financial.

The math behind Moss' sentiment is crucial for investors nearing retirement, as sequence risk sharpens the danger. A 30% drawdown in a single stock during accumulation years may be manageable, but the same drawdown in the first five years of retirement can permanently shrink the portfolio's ability to recover.

Moss also highlighted that owning these three names individually on top of a broad index fund double-counts the exposure. He noted that Apple accounts for roughly 7% of assets in the SPDR S&P 500 ETF Trust (SPY), while Alphabet's two share classes together add another 5%. Shopify, with its high volatility and no dividend, sits in a different risk bucket entirely.

Moss offered a framework for cutting big winners 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.'