Every day I talk to another investor who has a huge gain and concentrated position in America’s favorite company, Apple, Inc. I am willing to bet that no company stock has enriched as many individual investors as Apple. Whether it was the iPod in 2003 or the iPhone in 2007, Americans were buying more than Apple’s suite if daily tools, they were also buying its stock. And they held onto that stock, sometimes buying more on the dips along the way. A $10,000 investment in Apple in July of 2005 would be worth almost $700,000 today.
I have also worshipped at the altar of Apple. For the better part of a decade, I have owned the full suite of iMac, Macbook, iPad, and iPhone simultaneously, upgrading every few years. For some reason I never jumped on the watch bandwagon, but I cannot imagine life without AirPods. I shudder to think about what my dollars spent on Apple products would be worth if invested in Apple stock instead. I am not exaggerating when I say that Apple stock has single handedly allowed many investors to achieve financial goals they might not have otherwise achieved. For that I salute Steve Jobs, Tim Cook, and the amazing employees of this great American success story.
But now a lot of investors have a problem. Their portfolios are dominated by one stock and oodles of unrealized capital gains. Selling is painful in multiple ways. Not only are they letting go of a winner, but they have to pay taxes for the privilege of parting with it.
It is important not to fall in love with your stocks because they won’t love you back.
Remember when Apple became the first $1 Trillion market cap stock in late 2018? Today Apple’s market cap is more than $1.6 Trillion. Apple is almost 12% of the Nasdaq 100 Index and 6% of the S&P 500 Index. The same $10,000 invested the S&P 500 Index 15 years ago is worth ‘only’ $35,000 today versus $700,000 in Apple alone.
Trends like these don’t continue forever. Apple may be a high flyer for years to come, but why risk these enormous gains already made? I realize that letting go is painful, but losing a fortune made on an investment is even more so. The question becomes not when to sell some of these shares but how.
First, take a sigh of relief because you don’t need to sell every share. Your goal should be to reduce a concentrated position to an acceptable percentage of your overall portfolio. This number may differ depending on your time horizon, ability to save, and financial goals.
Imagine what would happen if Apple filed for bankruptcy tomorrow. Yes, I understand that is ‘impossible’ because of their cash on hand, low leverage ratios, market share, strength of brand, and yadda yadda yadda, but indulge me in this exercise. How would your life change if you lost it all? Would it threaten your ability to retire when you want and maintain your lifestyle? If not, fabulous. Your position size is probably appropriate. If yes, is this a risk you are comfortable taking? Because you are taking this risk every day that you let a single security dominate your investment portfolio.
As with most financial decisions, it’s important to have a plan in place. Avoiding regret is the trickiest part of reducing a winning position. One way to minimize regret is to sell portions of your stock in on a predetermined schedule. That schedule may be spread over multiple years to avoid paying too much capital gains tax in a single year. And don’t forget, you can hold on to some of the shares forever if you want.
You hit a stock market homerun. Congratulations! Many investors will never have this experience, and you may not have another one in your lifetime. Just make sure you get to enjoy some of your winnings. Otherwise, what was the point?