Club mailbag: Apple and Nvidia are in my top 5 holdings. Is my portfolio still diversified enough?

May 26, 2023

in Economy

Reading Time: 3 mins read

Apple and Nvidia are both “hold it, don’t trade it” stocks. To be diversified, we shouldn’t have two similar category stocks in our top 5 holdings. With the recent jump in Nvidia pricing, I now have both in my top 5 holdings. Should one be trimmed out of the top 5? —Cyrus S. We can’t offer up personal investment advice on exactly when to trim a position. But what we can say is that “own it, don’t trade it” doesn’t mean that you should never, under any circumstances, sell shares. We do believe in diversification and have, at times, needed to trim a winner when its weighting has become too big as a percentage of our overall portfolio. Consider the case of Apple (AAPL), our long-held “don’t trade” name. But as much as we love the company, we don’t want to be the “Apple fund.” So in April 2022, we sold shares when our position had risen to 6.75%; at the time, no other position was above 5%. Any time a position is above 6% of our portfolio, we typically like to trim it back and reduce its weighting so that on any given day, the portfolio’s movement is not directly tied to one individual stock. It’s also important to think about diversification beyond just sectors . Apple and Nvidia (NVDA) are both based in the United States and are considered mega-cap tech stocks. Where they differ, however, is in the end markets each company serves. Apple is very much a consumer name. We’ve argued that it should be valued as a consumer packaged goods name in part because its iPhones are basically staples in today’s connected world. Nvidia, on the other hand, is driven mainly by the data center end market, with customers such as cloud service providers and enterprise players — not people that shop at Best Buy . (Nvidia does have a presence in the consumer market through its gaming chips). Whereas iPhones, iPads, Macs, wearables and services drive Apple’s revenue, artificial intelligence adoption and the need for accelerated data centers are driving Nvidia. With that in mind, you are more diversified by owning Apple and Nvidia than Nvidia and another chipmaker like Advanced Micro Devices (AMD); or Apple and Qualcomm (QCOM), both of which are heavily reliant on smartphone demand — even if they have become a bit less correlated as Qualcomm has become more Android focused. One caveat: Exchange-traded funds (ETFs) are driving so much of the daily market action, there’s a good deal of correlation in mega-caps with rotations into and out of technology. Ultimately, the strength of the correlation of the moves is your best indicator of diversification. Be mindful that correlations become more positive when volatility increases. Every investor’s situation is unique, so we can’t say when (or if) you should shrink a position. But know that even those stocks you plan to own and not trade sometimes need a bit of pruning — or they’ll overtake the performance of the entire portfolio. There are also many ways to think about diversification. End markets, in this case, is the most relevant one to consider. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A man walks past the barricade of India’s first Apple retail store, that will be launched soon, at Jio World Drive Mall, Mumbai, India, April 5, 2023.

Francis Mascarenhas | Reuters