Position sizing determines how much a single investment can affect the portfolio.
Concentration
A large position increases both upside exposure and the impact of a negative surprise.
Risk-based thinking
Consider business risk, valuation risk, liquidity and portfolio correlation rather than using one universal percentage.
Review
Reassess size as prices, fundamentals and the rest of the portfolio change.
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Position size converts a view into portfolio risk
Even a correct thesis can damage a portfolio if the position is too large. Position sizing should connect conviction, downside, liquidity and portfolio concentration.
Risk-based sizing
A simple framework is to decide the maximum portfolio loss acceptable if the thesis fails, estimate the loss from entry to invalidation, and size the position accordingly. This is a framework, not a universal formula.
Correlation matters
Five apparently different holdings can share the same underlying driver. Size correlated positions as a group, not only one by one.
Liquidity matters
Small-cap or thinly traded securities may have larger execution costs and gaps. Position size should account for the ability to exit without materially moving the market.
Position-sizing checklist
- ☐ Maximum loss defined
- ☐ Invalidation defined
- ☐ Liquidity considered
- ☐ Correlated exposure considered
- ☐ Portfolio concentration checked