All Things Financial Planning Blog

Don’t Put All Your Apples in One Basket

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Despite its recent declines, Apple stock is still up 543 percent since the market low of March 9, 2009. Even if you bought Apple last year, you still made a hefty 40 percent return. There is no denying that Apple has been a fantastic investment. Maybe you didn’t purchase any Apple stock, so you think you missed out on a great opportunity. But whether you bought the stock or not, unbeknownst to you, you may actually own much more of that famous fruit than you think. Be careful, too many bites of Apple could make your financial stomach (portfolio) hurt if the stock continues to slide.

Watch Your Weight

Most investors use mutual funds to diversify and gain exposure to well known indexes such as the S&P 500 or NASDAQ. Nearly all large cap funds boast having Apple as one of their top 10 holdings. It is true that these indexes offer the opportunity for diversification because of their broad based holdings, but because these indexes are market-cap weighted, their exposure (and your risk) to Apple grows every time Apple stock rises. Indexes are created in one of three ways: price weighted, market-cap weighted, or equal weighted. A price weighted index (i.e. Dow Jones Industrial Average) is heavily influenced by the highest priced stock in the index; a market-cap weighted index is heavily influenced by the largest company in that index; and an equal weighted index is adjusted periodically so that each component has an equal weight.

Many mutual funds and Exchange Traded Funds (ETF) that track the S&P 500 or NASDAQ have seen their exposure to Apple grow over time because most are market-cap weighted. For example, the Fidelity Contrafund (FCNTX) has seen its exposure to Apple grow from 6.9 percent in 2011 to 9.4 percent in 2012; the SPDR S&P 500 (SPY) went from having 2.7 percent of its assets in Apple to 4.4 percent in 2012; and PowerShares NASDAQ (QQQ) has nearly 18 percent of its assets in Apple, up from 15 percent in 2011. If you think you have sufficiently diversified by owning these large cap funds and have a few shares of Apple on the side, you may have too many Apples in your proverbial basket.

Don’t Follow the Herd

Investors and actively managed mutual fund managers alike are known to follow the herd. Fund managers that do not have Apple stock in their top 10 holdings saw their judgment questioned by the fund’s shareholders, similar to when Warren Buffett was questioned by shareholders as to why he would not buy dot.com stocks in the 1990s; Buffett was later vindicated for having avoided the dot.com bubble. During the dot-com era, it seemed everyone was investing in internet stocks. It wasn’t uncommon to hear everyday investors at cocktail parties brag about their investments in Cisco, Lucent, AOL, and other venerable companies that subsequently lost tremendous value when the market collapsed. The people who lost the most in their retirement and investment accounts were those who became overly concentrated in a single sector or stock and failed to diversify out of those positions. They only realized after the fact that they were overexposed to technology stocks. Fast forward a few years, and these same individuals migrated to the next hottest investment – real estate. Many wrongly assumed that real estate would never lose value. After that came the gold craze, and most recently the Apple sensation. What’s next? Facebook?

Use the 5% Rule

While it’s a great feeling to see one of your stock picks skyrocket like Apple has, the reality is that not all of your stocks will be future winners. I always recommend that clients keep no more than 5 percent of their total portfolio in individual stocks because, while individual stocks can have tremendous growth potential, one bad stock can ruin your entire portfolio, especially if that one stock is a large part of your portfolio. No one expected such giant companies like Enron, Fannie Mae, General Motors, Lehman Brothers, AIG, Circuit City, Global Crossing, WorldCom, UAL Corp (parent of United Airlines), AOL, Lucent, etc. to either go bankrupt or completely wipe out their shareholders, but they did, and many people lost their entire life savings. Do not let yourself become overly exposed to one stock or sector of the market.

I am not attempting to predict the future price of Apple or advising against owning individual stocks altogether. I am simply reminding investors of the clear, but sometimes not-so-easy decision to review your portfolio periodically. Make sure you are not overly exposed to any segment of the market, and that you’re not taking on more risk than you can handle.

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA

Author: Ara Oghoorian, CFA, CFP®

Ara Oghoorian, CFA, CFP®, is the founder and president of ACap Asset Management, Inc., a boutique wealth management firm located in Los Angeles, CA. ACap provides comprehensive investment management and financial planning services with a niche in advising physicians and medical professionals. Ara began his professional career 20 years ago at Wells Fargo Bank in Huntington Beach, CA piloting new supermarket banks. He then moved to San Francisco to obtain a degree in finance and worked full time at the Federal Reserve Bank. Ara spent nearly nine years there as a bank examiner where he audited U.S. banks, bank holding companies, and foreign institutions from Japan, Hong Kong, China, Korea, Taiwan, Philippines, United Kingdom and France. In 2005, Ara accepted a prestigious position with the US Department of the Treasury as the resident advisor to the Ministry of Finance and Economy in the Republic of Armenia. He was responsible for advising the top officials of the Republic of Armenia on how to transition from a centralized audit function to a decentralized system. Upon his return to the US, Ara worked for a wealth management firm in the Washington DC area advising and managing the personal wealth of CEOs from Fortune 500 companies. Ara has spent his entire career in finance and as a result, he has a firm grasp of financial markets, economics, and their interactions. He is a member of the CFA Institute, CFA Society of Los Angeles, Financial Planning Association of Los Angeles, NAPFA, and Toastmasters International. In addition to his work in finance, Ara also sits on the board of the World Children’s Transplant Fund where he also chairs the annual Global Partners’ Dinner. Ara is a frequent speaker at local medical schools, medical societies, professional organizations, and private businesses. He has a degree in finance from San Francisco State University, is a Commissioned Bank Examiner through the Federal Reserve Board of Governors, holds the Chartered Financial Analyst (CFA) designation, Certified Financial Planner designation, and holds the Series 65 license. Ara currently lives in Los Angeles with his wife and two sons.

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