How One Individual Stock Can Spoil or Supercharge an Investment Portfolio

April 25, 2022
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Netflix released earnings last week. The report did not go well for those who were existing shareholders. It lost roughly a third of its price the day after the company reported.

If NFLX made up a large position in your overall portfolio, your account would have significantly suffered. If a one-million-dollar account has a 20% holding in one stock that loses 1/3rd of its value (assuming the rest of the investments were flat), the portfolio would be worth around $934,000 by the end of that 24-hour period.

The impact of that one stock would have spoiled the whole account in a single day.

On the other hand, having a strong individual stock performer through the years as a primary position can supercharge a portfolio. If you had a $1,000,000 portfolio 5 years before April 20, 2022 that took a 20% position in Apple stock, the portfolio would be worth approximately $1,740,000 (not counting dividends)—even if the rest of the investment holdings did absolutely nothing over that time span.

Not too shabby.

Superhero stocks like Apple are the exception though, not the rule. The evidence speaks for itself: “Studies on the Compustat dataset, which is provided by S&P 500 and consists of 28,853 companies that were traded on US markets between 1950 and 2009, show that the half-life of a company is roughly 10.5 years, meaning that 50% of companies die after only 10.5 years.”[1] This is one reason why arguments for diversification are so powerful.

None of this is a buy, sell, or hold recommendation for Netflix, Apple or any other individual stock. It’s meant to serve as a reminder of how a portfolio that is heavily concentrated in one position can be affected.

Look at yours. Do you have any heavily concentrated positions that need to be revisited? Do you need help making portfolio decisions? Are you concerned about how a family member or friend is invested? Set up a meeting with us or send someone our way to discuss risk management.

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Sources:

1. This quote comes from Thomas A. Dorfer’s April 1, 2020 summary of physicist Geoffrey West’s book Scale: The Universal Laws of Growth, Innovation, Sustainability, and Pace of Life in Organisms, Cities, Economies, and Companies. Accessed online: https://medium.com/swlh/scale-a-book-summary-3d39d16321ef (April 21, 2022)