No investment is forever

Lo! How the mighty are fallen. That darling of everyone, Apple Inc., has hit a rough patch lately which at one point had dropped its share price by about 20%. Then, it was revealed that Berkshire Hathaway had taken a $1 billion stake in the stock, and up it went, because we all know that Buffett and Berkshire only buy great investments at a bargain, right? (No, don’t rely on that either).

Another old venerable, Exxon, recently had its S&P bond rating reduced from AAA to AA+. It’s been AAA since 1949. Even bond ratings ripple from time to time. On the other hand, Apple’s rating was in junk territory in 1997, and now it’s the same as Exxon.

Exxon, along with a few other large caps, has usually been considered a “widows and orphans” company—safe for the most conservative investors. Johnson and Johnson is another one, but it’s had a rocky road of recalls and product attacks. Nothing is forever, and you should make an effort to be aware of changes, even though I encourage you not to be whipsawed by every bit of news.

During my recent conference at Dimensional Fund Advisors, a speaker mentioned that Apple and Exxon each represent 3-4% of the entire market! In fact, DFA reduces their holdings in both these companies from what a typical index fund (which tries to mirror the market) will hold.

Oh, you say, but I don’t own these individual stocks. Um, somewhere you probably do. For example, the Fidelity Puritan Fund has 2.24% (its 2nd largest holding) in Apple. Vanguard Wellington has 1.08% in Apple and 1.27% in Exxon. Vanguard Total Stock Index has 2.26% (its largest holding) in Apple and 1.68% in Exxon—and just about any target retirement fund you have is going to have one or both of these companies, probably as one of its largest stock holdings. And in a real “contra” move (NOT!), the Fidelity Contrafund has 2.91% of its portfolio in Apple. If you also own some individual shares (my hand’s up, but don’t take this as any recommendation) or put a little money in a technology sector fund, you may be way more invested than you think in this very small segment.

You can hardly avoid these two stocks, and they may actually be companies that are too big to fail, at least without disastrous impact on the world economy. The point I want to make is that a target date or life strategy or any balanced or all-purpose fund still needs to be examine for what exactly is in the portfolio. Especially with target date funds, we think we know how they’ll operate, but they don’t have a long enough history for us to be sure. Examine your portfolio for overlap if you intend to protect yourself by diversification. You may have less variety than you intended.

Posted in General Financial Planning, Investment Planning.

Leave a Reply

Your email address will not be published.

Time limit is exhausted. Please reload the CAPTCHA.