Learn the stock market › Risk › Lesson 5 of 5
When one stock gets too big in your portfolio
Equal at the start, uneven today
On Nov 6, 2016, each of the 19 largest US companies today that had prices then got the same amount of money, 5.3% of the whole. Nothing has been bought or sold since. This is how large the five biggest parts are today:
| Company | At the start | Today | If it halves, the whole falls |
|---|---|---|---|
| Nvidia | 5.3% | 32.1% | −16.0% |
| AMD | 5.3% | 19.4% | −9.7% |
| Tesla | 5.3% | 8.4% | −4.2% |
| Eli Lilly | 5.3% | 6.4% | −3.2% |
| Broadcom | 5.3% | 6.4% | −3.2% |
The three largest, Nvidia, AMD and Tesla, are together 60% of the portfolio. What began as an even spread has become a portfolio where a few companies decide a lot. No decision did that; the prices simply moved by different amounts.
What rebalancing does
Rebalancing means selling some of what has grown and buying more of what has shrunk, so the parts are back where they started. The same companies, reset to equal parts once a year, returned +32.1% a year, against +33.1% left alone.
Here rebalancing gave a little less, because money was moved away from companies that kept rising.
What rebalancing changes most is how much rides on a single company. Commissions and taxes on each sale are not in the numbers.
A limit set in advance
No share is right for everyone. A fund spreads its money across many companies by design, see the lesson on mutual funds. For your own stocks you decide, and it is easier to do before a company has grown than after. How many shares a trade can be once you have decided how much you are willing to lose is worked out by the position size calculator, and how much more companies change the outcome is in the lesson on diversifying.
How Nvidia is moving today is on Nvidia's stock page.
Test yourself
You own two companies, half each. One rises 200% and the other stays flat. How much of the portfolio is the first company now?