Stock Position Sizing: Is It Worth It?
Up until late last year, I invested like I gambled: fold or go all in. The result? A pretty disasterous 2008
What is stock position sizing? It comes down to finding the right amount of stock to buy that allows you to capitalize on a good stock pick, while still maintaining a lower amount of risk. There are two parts to position sizing to keep in mind:
Number of Positions
The more positions you have, the lower the risk. Consider this: if you have a 10 position portfolio, and you take a 30% haircut on one stock pick, your portfolio would only be down 3%. If you had a 20 stock portfolio, your portfolio loss would be 1.5%. This allows your stocks to take a bit more of a wild swing without getting stopped out.
Size of Each Position
Where most investors make the biggest mistake is in the size of each position. We recommend taking an even position size. If you have a $20 000 portfolio, and you want to take 10 positions, you would buy $2000 each. Whether that means you end up with 100 shares of a $20 company or 2000 shares of a $1 company, each position has the exact same exposure to risk.
If you think that a $2000 position isnt much, you’re focusing on how much profit you could make versus how much money you are risking.
At the Market Edge 360, we take between 5 and 10 positions depending on how we see the market moving. We wont be fully invested all the time, and depending on the market direction, may find outselves with only a few positions. However, the amount per position will never be more than 10-20% of the entire portfolio.