I’m sure you’ve heard the many stories of the fortunes being made by people who’ve held onto company stock throughout their careers. Undoubtedly, a vast majority of the success stories of newly minted millions have been focused on options for early-stage firms and startups. At the same time, there are also stories of company stock holding that have gone up in smoke!
When it comes to being issued common stock by a behemoth-sized employer like Amazon (NASDAQ:AMZN | AMZN Price Prediction), you probably won’t land any sort of jaw-dropping gains. In the case of a Reddit poster holding $117,000 worth of AMZN shares, wondering if they should sell some to diversify their portfolio, I do think there are questions one needs to ask themselves before they take action (or lack thereof).
Most notably, it’s whether they feel comfortable holding onto that many shares and if they’d be fine if AMZN stock were to take another massive tumble like the one suffered back in 2022.
Key Points About This Article
- How much is too much of a single stock to keep holding onto?
- Amazon is a top-tier blue chip that may be worth holding, provided you’re not extremely overexposed to the one name.
- Also: Are You On Track to Retire? Take This Quiz and Find Out (Sponsored)
The case for selling Amazon stock for the sake of diversification
At this juncture, AMZN stock is a blue-chip behemoth in the tech world. And while shares are still very much capable of magnificent returns over a long-term timespan (Amazon is a member of the Magnificent Seven for a reason), I don’t think there’s any downside to selling a stake to improve upon one’s diversification.
If the investor has any doubts about their ability to ride out the next recession or market downturn, diversifying one’s portfolio ought to be a main priority. While diversifying won’t remove all the market risk from a portfolio, it can help smoothen the bumps, especially if the next market sell-off is concentrated within a certain sector, industry, or theme. With all the worries about whether we’re not in an AI bubble, perhaps those who are concerned may wish to lighten their position in the high-momentum AI stocks.
Amazon is a notable player in the AI game and one that could face huge downside risks should AI stocks be in for a collective tumble. If any worries about such a decline are there, I think selling stock for the sake of diversification is not a terrible idea in the slightest. Amazon is a solid $2.2 trillion titan now, and one that may or may not be able to power markedly higher if its AI innovations fall behind the pack.
Though Amazon’s AI is intriguing, it definitely isn’t a top AI play. That title goes to OpenAI.
Of course, there’s also a chance Amazon’s AI efforts could pay off more than its peers. And in such a case, perhaps holding AMZN stock could prove smart. Either way, one in a similar boat should ask a financial adviser their thoughts. I’d be willing to bet that diversification trumps single-stock concentration.
Holding onto AMZN stock could be a winning bet, too.
Of course, diversification is a hot topic of debate. Some folks, like Warren Buffett and Charlie Munger, may view diversification as overrated.
“Diversification is protection against ignorance. It makes very little sense for anyone that knows what they’re doing.” Buffett once said.
Indeed, Buffett is a man who practices what he preaches, as his Apple (NASDAQ:AAPL) position previously accounted for a massive double-digit percentage of the Berkshire Hathaway (NYSE:BRK-B) portfolio before his latest AAPL stock selling spree. Though the Apple position is still quite sizeable, I think it’s safe to say that he’s more than comfortable holding many, many shares of the firms he finds wonderful, provided the valuation still makes sense.
At 44.5 times trailing price-to-earnings (P/E) and 33.4 times forward (P/E), I’d argue the valuation on AMZN stock isn’t all too excessive, especially considering the potential growth that could be ahead for e-commerce, the cloud, and AI. If Amazon can manage higher growth and better margins, perhaps the stock could be well on its way to a $3 trillion market cap.
That said, if AMZN is worth more than 20% of one’s portfolio, diversifying could be the better move. You don’t need to be too heavy in a single name to benefit from a continued surge.
The bottom line
Amazon is a great company that has all the levers to continue higher. Despite that, shares could still be at risk of substantial downside if a tech correction were to hit next year. As such, if you believe you’re overexposed and underdiversified, don’t be afraid to sell and pick up some index ETFs. That way, your portfolio won’t get too damaged come the next AI- or tech-driven downturn.
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