If you have clients who have more than 10% of their net worth in Apple stock, please read on.

You might want to consider how much uncompensated risk your clients are taking. Why? Because trees, even Apple trees, don’t grow to the sky.

At its recent highs, Apple is valued at about $2.9 trillion.

Is Apple is worth $2.9 trillion? Only time will tell. But that’s probably the wrong question.

The right question for owners of large amounts of Apple is: can I expect to be compensated for the risk I take in my Apple?

200 Companies, or One?

Do you think there’s more risk in owning a portfolio of 200 companies, or of owning a single company, even a company as good as Apple?

Finance theory, and almost all professionals, would agree that it is less risky to own a diversified portfolio of 200 companies.

At today’s valuation levels, Apple alone, at $2.9 trillion, is worth as much as the bottom 200 companies in the S&P 500!

Or, Apple alone is worth more all the following companies put together:

           Mastercard

+         Home Depot

+         Chevron

+         Merck

+         Coca Cola

+         Costco

+         Walmart

+         McDonalds

+         Bank of America

+         Disney!

There is nothing particularly special about these ten stocks. They are ten of the biggest and most well known (and important) companies in the US.

We all know the expression, “Don’t put all your eggs in one basket.”

If you didn’t already own exposure to the US market, would you put all your eggs in a single basket called Apple? Or would you rather own ten of the biggest and most important companies?

Apple’s Future – Irrational Exuberance?

We have no crystal ball, and no special insight. But we can do math.

Since the year 2000, Apple has returned a compounded annual return of almost 40%.

Mathematics assures us that it is virtually impossible that it will do so over the next 23 years.

Here’s the math.

Apple is worth $2.9 trillion today.

If that $2.9 trillion were to grow by a compounded 40% a year for 23 years, that $2.9 trillion would have to grow to $6.4 quadrillion. Let’s put that in perspective.

According to a recent McKinsey study, total GLOBAL assets today are worth roughly $500 trillion.

Global GDP has grown at about 3% since the 1960s. The total value of global assets can’t grow much faster than the GDP growth rate over the long run.

If we compound $500 trillion at 3% per year for 23 years, we get $986 trillion.

In other words, the entire value of ALL GLOBAL ASSETS in 23 years is likely to be about $986 trillion, or roughly 1 quadrillion.

It is mathematically impossible for Apple, or any company, to be worth more than all the assets in the world. So it is mathematically impossible for Apple to grow at the same rate grown for the past twenty-three years.

Taxes

Aside from an irrational faith that Apple can continue to outperform as it has in the past, the main reason people don’t diversify holdings is taxes.

People who have big gains in Apple, and sell their positions, will pay a lot of tax.

Solutions

Many advisors are familiar with several possible solutions, including exchange funds, and various hedging strategies. But not all are aware of a tax-exempt Stock Diversification Trust.

A qualifying stock diversification trust is a tax-exempt entity that allows the client to sell a stock, keep 100% of the proceeds available for reinvestment, and produce income for the client and the client’s family. When we run the numbers on these trusts, using the trust, instead of selling and paying the tax, the family in most cases can expect to get more than twice as much total net spendable income.

Sterling has published an Advisors Guide to Concentrated Stock Positions. If you would like a free copy, please request it here. Or if you have a current client situation and would like to discuss it with us, please call 703 437 9720 and ask for Connor or Katherine.