Scare on Monday when Apple

Investors got a scare on Monday when Apple, among the best-performing stocks of 2012, tumbled 4.2%, capping a five-day stretch while which it lost 8.8%. The stock continued its slide later in the week, finishing Friday down 10% from its all-time high.

You didn't have to own a single share to feel the pain. In other words because Apple, the largest public company in the U.S., now makes up more than 4% of the Standard & Poor's 500-stock index and nearly 18% of the Nasdaq-100. On some trading days, Apple alone can determine whether broad stock indexes are up or down. On Monday, to illustrate, the Nasdaq fell 1.1%, during the Dow Jones Industrial Average, which doesn't include Apple, rose 0.6%. On Friday, Apple fell 2.5%, sending the Nasdaq down 0.4% even as the Dow rose 0.5%.

Making matters trickier, a broad swath of mutual funds have been piling into Apple shares of late-even funds dedicated to such specialties as small-company and emerging-market stocks. The result can be what experts call "concentration risk," or too big a position in a single stock.

The good news is that there are ways to reduce this risk. By sticking to broader market indexes, choosing alternatives to traditional market-capitalization-weighted mutual funds and investing in other companies that benefit from Apple's growth, you can cut back on Apple and for all that prosper if the stock continues to rise.

"Apple's had an amazing run," says Barry Knapp, chief equity strategist at Barclays Capital in New York. However "once a stock gets to this level of contribution, you have to think about its effect on markets."

It isn't clear whether Apple, at $573 per share, is over- or underpriced. Depending on the valuation measure used, different investors can come to different conclusions.

Apple is another story. Since it rolled out the iPhone in 2007, its P/E has shrunk, notes Horace Dediu, a former telecom analyst at Nokia and founder of Asymco, a data-analysis firm in Helsinki. In 2007, Apple's P/E based on the straightway 12 months of revenues was about 30; now it is about 12.8, compared with the S&P 500's average of 12.5.

One reason why Apple's P/E is so reasonable, experts say, is that the research sector is especially fickle, and investors are unsure of future profits. "This is a innovation company in a world where research changes quickly," says John Goltermann, a portfolio manager at Obermeyer Asset Management in Aspen, Colo. "Now, it's the incumbent, nevertheless that's not necessarily going to be the case forever."

Portfolio-management standpoint

Purely from a portfolio-management standpoint, nevertheless, whether or not Apple is overvalued is largely irrelevant. What matters is how much the company dominates your overall holdings.

Yet many investors aren't heeding that advice. Financial planner Bruce Primeau of Summit Wealth Advocates in Prior Lake, Minn., says he just brought on a client who has nearly 20% of his portfolio in Apple stock, which the client plans to manage by himself, outside of Mr. Primeau's purview. Mr. Primeau says he is trying to convince the client to diversify out of the holding, however has had little success so far.

The cows come home on the rest of the portfolio

"I can run retirement projections until the cows come home" on the rest of the portfolio, he says. "Nevertheless no matter what I do, Apple is going to have the most significant impact."

History hasn't been kind to companies that dominate the S&P 500 to the extent that Apple now does. Since 1990, four other companies have comprised 4% or more of the index, according to the Leuthold Group: Microsoft in January 1999, General Electric in December 1999, Cisco in March 2000 and Exxon Mobil in April 2008. None of them stayed at that level for more than one year. Apple crossed that threshold in February and remains there now.

The reason they slide?

The reason they slide? Big companies tend to be less flexible, are easily distracted into markets outside their specialty and face higher government scrutiny, according to Technology Affiliates' Ms. Li. To wit: The U.S. Justice Department last week sued Apple and book publishers for allegedly colluding to raise prices. Apple declined to comment.

Despite the risks, some fund managers have been ramping up their allocations to Apple dramatically in the past few years, as Apple's stock has soared.

The $108 million Matthew 25 fund

The $108 million Matthew 25 fund, for instance, has 17.6% of its portfolio in Apple, the largest holding among all large-cap stock funds, according to investment-technology firm Morningstar. In other words up from 10.7% in March 2009. The DWS Large Cap Focus Growth fund has a 14.6% stake in the company, up from 3.6% three years ago. And Fidelity Contrafund, a core holding in many 401(k)s, as of the end of February had near 10% in the company, more than three times its position at the end of March 2009.

Mark Mulholland, the portfolio manager of the Matthew 25 fund, says having a 17% stake in a single company isn't abnormal for the fund, which owns 19 stocks. Because Apple has been so strong it would be "more risky not to have a heavy position," he says.

A Fidelity spokeswoman said the Apple holding has benefited Contrafund shareholders and is a result of the manager's "rigorous investment process." A DWS spokeswoman says the managers of DWS Large Cap Focus Growth, a portfolio of 35 stocks, look for companies that have attractive valuations, will benefit from strong secular growth stories and have products that are gaining market share.

Examine everything. Apple has been showing up in unusual places, including small- and midcap, foreign, emerging-market and European stock funds, among others.

A caveat: Reducing exposure to Apple means investors could miss out on future gains. However, given the stock's rapid climb, many experts recommend an overall exposure of 3% to 5%.

People who invest primarily in index funds can reduce their exposure simply by broadening the indexes they use. During the PowerShares QQQ ETF, the most popular index fund that tracks the Nasdaq-100, has a near 18% stake in Apple, that drops to about 4.5% for the SPDR S&P 500. The iShares Russell 1000 ETF, which follows the largest 1,000 companies in the U.S., has a 4% weighting, during the Vanguard Total Stock Market ETF, which tracks the MSCI U.S. Broad Market Index of almost all U.S. stocks, has a 3.6% stake.

Indexes that are weighted by factors other than market capitalization can reduce the impact of Apple furthermore, says Cokie Berenyi, a financial planner at Alphavest in Charleston, S.C. She recommends keeping money in ETFs that weight stocks evenly, to put it more exactly than by market capitalization, to avoid overconcentration.

The Guggenheim S&P 500 Equal Weight ETF

The Guggenheim S&P 500 Equal Weight ETF, for instance, has only about a 0.2% allocation to Apple-and the rest of the stocks in the index. This year, the ETF has returned about 11%, in broad outline the same as the market-cap-weighted SPDR S&P 500 ETF.

A few actively managed mutual funds have been among the top performers, in spite of relatively small positions in Apple. As of April 18, the Dynamic U.S. Growth fund and the Weitz Innovation fund ranked among the top 10% of large-cap growth funds while the past 12 months in spite of owning no Apple shares in their most recently announced portfolios, says Morningstar. The Thornburg Core Growth fund as well ranked in top 10% of its peers, according to Morningstar, in spite of having only a 3.1% stake in the company. The funds have expense ratios of 0.95%, 0.9% and 1.45%, respectively.

For holders of individual stocks, the best approach is to identify other companies that will benefit from the forces that are driving Apple's stock higher, says Amy Lubas, a strategist at Ned Davis Innovation, including the mobile Internet, cloud computing and the continued digitization of media.

That means looking at Apple's suppliers, just as chip-makers Qualcomm and Skyworks Solutions, and companies set to benefit from the continued growth in the mobile Internet, just as data-storage provider EMC.

"You might not want too much Apple, however fighting those trends would be foolish," Ms. Lubas says. "They're all intertwined."