How do you determine the percentage of your portfolio a stock makes up? Is it the number of stocks, the price of the stock, the amount compared to sector, or some other variable?
It’s hard to tell exactly what the question is here, so we will answer both possibilities. If you are asking how to do the math, take the total dollar amount of the holding and divide it by the total dollar amount of the portfolio. That will give you the percentage a stock makes up.
What we assume to be the more likely question, “How do we decide what percentage of the portfolio should be held in a position?” At Henssler, we look at several things. We first look at the portfolio’s benchmark’s holding. We often look at whether we want to be over- or underweight in a stock relative to the S&P 500. It is harder to underweight a fast-growing stock because, as it grows, it can become a larger percentage of your portfolio, relative to the benchmark. Generally, an investor’s portfolio will have fewer stocks than a benchmark like the S&P 500, which has 500 holdings.
We also hold companies that are not in the S&P 500. In those instances, we often consider the sector’s weight in the benchmark. If we are looking to underweight a sector, we may not hold large positions. We currently do not hold any telecommunications positions.
We also look at the total percentage currently held. We generally avoid position greater than 5% of a portfolio. However, we have held some positions at a weight greater than 5% when they are diversified, meaning not heavily reliant on the actions of one company. For example, we might overweight a diversified exchange-traded fund that consists of many underlying stocks.
At Henssler Financial we believe you should Live Ready, and that includes understanding your portfolio’s construction. If you have questions regarding your holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at email@example.com.