I was faced with an interesting challenge earlier this year by a client who received a gift of Amazon Inc. stock shares. The question, of course, was what to do with them? Keep them or sell them and reinvest into a diversified portfolio of something else? Tough decision since Amazon shares had been on a tear with some hugely positive momentum; up an amazing +76% during 2020!
The first step in the decision process was to confirm the client’s risk profile and overall financial situation. The youngish client had a capacity for risk and certainly could handle the risk of a single-stock portfolio, but the Amazon shares made up about 50% of her net worth. Should she take the risk?
This is where we get into “idiosyncratic” risk, the risk specific to an individual stock that cannot be eliminated but can only be reduced by holding that stock in a diversified portfolio. Though Amazon certainly has proven itself to be a “great company” through its tremendous growth, product/service mix and service model, that does not mean it is a “great stock”. A growth stock that is “overpriced” with an intrinsically high level of risk and no potential for the same level of future appreciation is not a great stock. No one knows, of course, how Amazon will do in the future.
After careful discussion, the client and I decided to sell the Amazon shares on March 10, 2021 and buy a mostly passive globally-diversified exchange-traded fund (ETF) with an aggressive risk profile, the iShares Core Aggressive Allocation ETF (AOA); an ETF with an 80% equity weighting and 20% fixed income weighting. A review of the risk profiles of these two investments showed that AMZN shares had a historical risk profile more than double that of AOA!
As you can see in the chart below, there were some tense moments over the past five months; AMZN (the blue line) took some big leaps during April and July but came crashing back down in August such that the AOA investment (the red line) is now outperforming AMZN over that time horizon, +9.06% versus +7.92%.
No telling if Amazon stock will find its way back to extraordinary performance, and the short time horizon and impact of end-period bias makes this analysis inconclusive, but for now my client can rest assured that her diversified investment in AOA will help lead her to a more balanced path of growth to help achieve her goals.