Position Trading - getting comfortable with size?

S

smili

Hi all, I'm mostly a longer term position trader or even long term investor, but I've realized I have a problem with size and was wondering if there are any tips for getting comfortable with larger position sizes in portfolios?

More particulars:
- My portfolio consists of equities/stocks and may hold positions for years, so I'm probably more of an investor than a trader, although I sometimes do trade on shorter timeframes if the situation presents - but in general I'm drawn to trades that take time to bear out.
- Mathematically I can understand that a portfolio of 20-25 stocks means I need to put 4-5% of portfolio into each position, but that can "feel" like a very large size when I go to do it, and I find I often will try to step into a position over time, but often stop before I get to 4-5%. This ultimately means I end up having to track more companies and find more ideas than I probably should, but I admit I have difficulty as individual position sizes grow. Should I just bit the bullet and buy a full position all at once, or...? Ideas appreciated.
- I have a somewhat quantitative approach, so this naturally leads to me probably preferring more diversification than I need. I know that 20-25 positions will probably give me the diversification I need, and backtests tell me this is true from a performance standpoint, but it's difficult to resist spreading between a higher # of positions.
- Larger portfolios are quite a bit more difficult to keep track of. Intellectually I know this, but psychologically a greater # of positions feels more "prudent". ;-)
- Compounding problems are my perception that current market values seem high, and forward expected returns are probably low. Overall I'm trying to save cash for the next correction - so that leads me to be more conservative than I might should be.
- I realize in down markets I am much more risk averse than I am in "normal" markets - so having cash is good. I love buying in down markets, so I hold cash for that. Mathematically I know this probably damages my long term returns, but at current mkt valuations I can't convince myself to be 100% invested.

Anyhow, that's pretty much what's in my mind. Actually implementing the plan of a 20-25 stock portfolio is difficult for me in practice. The position sizes seem "large" to me, and I worry a bit more than I should to have a clear head (general mkt levels are a part of this I think). If you've been through similar scenario, I'd appreciate tips on how you mentally get yourself to accept the risk of large position size/concentration, and how you handle the risk aversive elements of your psychological make-up.

Comments much appreciated.
 
- Have you really checked that you have genuine stock picking abilities compared to an index? If no then just buy "cheap" index and save the extra hassle of following individual stocks.
- You mention not being 100% invested at this time. I can understand that but how much do you know about alternatives and have you a decent broker. You could still be 100% invested now (not necessarily stocks but perhaps corporate bonds) and use a credit line or instruments with higher leverage to buy if the market falls.
 
Jakobsberg said:
- Have you really checked that you have genuine stock picking abilities compared to an index? If no then just buy "cheap" index and save the extra hassle of following individual stocks.
More...

- Tough to tell about alpha generation. I've had some alpha in past w/ Buffettology approaches, and current Quant research tells me certain methods I'm implementing have outperformed historically. I utilize some indexes (Vanguard stuff like VGK, VWO) to diversify internationally, and use EWY for South Korea exposure. But everything else is equity/cash. I think the think holding me back is not being comfortable with large position sizing and being able to "go for it" with size and get money in. Recently I've been able to move with some size into Energy and handle it pretty well, but I still am antsy w/ position size. I'm always looking for/expecting another pullback to fill out my positions.

Jakobsberg said:
- You mention not being 100% invested at this time. I can understand that but how much do you know about alternatives and have you a decent broker. You could still be 100% invested now (not necessarily stocks but perhaps corporate bonds) and use a credit line or instruments with higher leverage to buy if the market falls.
More...

I'll not use credit line or leverage - doesn't fit my risk tolerance at this stage of market cycle. I've considered some bonds (normally they'd be great for this situation while I'm waiting for correction), but they may be more highly valued than stocks, and likely get killed in rising rate environment that seems likely - but it's seemed likely for a couple years and hasn't happened yet. Bonds are not in my circle of competence really, but even in a correction how much lower can rates go?
 
the question is a good one, it's nothing new, but just the age old debate
the better question is "How old are you?"

cash, where is it coming from?

4% in one stock is usually considered the conservative limit

once you get more than about 7 stocks in a portfolio, it starts performing about like the market as a whole.

my ideal asset allocation over time would be 60% stocks 30% bonds and 10% cash, but we very rarely live in "ideal" times

me personally? all my money is sitting in the vanguard 500 index fund, but you know it's fun to "play" so I have one of those accounts at one of those well known brokerage firms where I buy individual stocks. It's harder than hell to beat that index. You may get it one year, just look at the stats, 85% of all professional money managers (including me) underperform the index.

3 stages to investing

1. accumulation stage, this is the stage you are in when you have a job and can invest cash each month, very little wrong you can do in this stage, you already have cash courtesy your employer and you can invest with abandon

2. preservation, this starts at about age 50, and like so many saw in 2009, 100% in the aggressive growth fund in their 401k was not such a good idea. And this is the brief time when I really like that 60/30/10 mix

3. distribution, and that means retirement income. and if you have done it right, you can be sitting 100% in the vanguard 500 fund, and a little to play with at your brokerage account, and no need for bonds or cash
 
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Cut the story short, but if you are not comfortable with 5% of your account allocated to a single stock investment times a 30% loss = 1.5% loss of your account then you should stop trading and stop investing. It means that you should put your investment into highly rated sovereign government bonds. 30% constitutes a large 1-day loss and I chose 30% arbitrarily but nonetheless it would represent a large unexpected loss. Your account would be negatively affected by 1.5% if you allocated 5% of your resources into such stock. If that is too much risk for you I highly recommend you to stay away from investing and particularly trading in stocks and rather allocate a large portion or everything into fixed income securities of high credit.

Simple as that, end of story.

smili said:
Hi all, I'm mostly a longer term position trader or even long term investor, but I've realized I have a problem with size and was wondering if there are any tips for getting comfortable with larger position sizes in portfolios?

More particulars:
- My portfolio consists of equities/stocks and may hold positions for years, so I'm probably more of an investor than a trader, although I sometimes do trade on shorter timeframes if the situation presents - but in general I'm drawn to trades that take time to bear out.
- Mathematically I can understand that a portfolio of 20-25 stocks means I need to put 4-5% of portfolio into each position, but that can "feel" like a very large size when I go to do it, and I find I often will try to step into a position over time, but often stop before I get to 4-5%. This ultimately means I end up having to track more companies and find more ideas than I probably should, but I admit I have difficulty as individual position sizes grow. Should I just bit the bullet and buy a full position all at once, or...? Ideas appreciated.
- I have a somewhat quantitative approach, so this naturally leads to me probably preferring more diversification than I need. I know that 20-25 positions will probably give me the diversification I need, and backtests tell me this is true from a performance standpoint, but it's difficult to resist spreading between a higher # of positions.
- Larger portfolios are quite a bit more difficult to keep track of. Intellectually I know this, but psychologically a greater # of positions feels more "prudent". ;-)
- Compounding problems are my perception that current market values seem high, and forward expected returns are probably low. Overall I'm trying to save cash for the next correction - so that leads me to be more conservative than I might should be.
- I realize in down markets I am much more risk averse than I am in "normal" markets - so having cash is good. I love buying in down markets, so I hold cash for that. Mathematically I know this probably damages my long term returns, but at current mkt valuations I can't convince myself to be 100% invested.

Anyhow, that's pretty much what's in my mind. Actually implementing the plan of a 20-25 stock portfolio is difficult for me in practice. The position sizes seem "large" to me, and I worry a bit more than I should to have a clear head (general mkt levels are a part of this I think). If you've been through similar scenario, I'd appreciate tips on how you mentally get yourself to accept the risk of large position size/concentration, and how you handle the risk aversive elements of your psychological make-up.

Comments much appreciated.
More...
 
there is a book written a while ago called "The Swiss Axioms" which discusses this very subject, and the gist of it is a life devoted to about 5 to 7 investing ideas, usually stocks
it's not for the fainthearted
and being a commodity trader for a living, I am very "fainthearted" when it comes to investing
 
volpunter said:
Cut the story short, but if you are not comfortable with 5% of your account allocated to a single stock investment times a 30% loss = 1.5% loss of your account then you should stop trading and stop investing. It means that you should put your investment into highly rated sovereign government bonds. 30% constitutes a large 1-day loss and I chose 30% arbitrarily but nonetheless it would represent a large unexpected loss. Your account would be negatively affected by 1.5% if you allocated 5% of your resources into such stock. If that is too much risk for you I highly recommend you to stay away from investing and particularly trading in stocks and rather allocate a large portion or everything into fixed income securities of high credit.

Simple as that, end of story.
More...

I agree. You should only be trading at a size that you are comfortable with - if that's 50% then, you have to evaluate if that's enough or find something else to do.
 
If you are uncertain about alpha ability then you probably not doing it so i would just ETFs.
Ok you dont want to use leverage, fine but it cuts down your choice of strategies.
For bonds check our short term corporates. They are not the same as long term sovreign debt and behave very differently.
 
when you have on the largest position you have ever had on, and unlike everything else in your life which always moves against you, miraculously starts moving in your favor, it is a beautiful thing
 
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