Size does matter: Why you should use position sizing
When it comes to investing in a particular share, you probably ask yourself: How much should I invest in it? Of course, this depends on your net worth, investment experience, risk tolerance and time horizon. Read on to find out why size does matter and why you should use position sizing…
If you want to know how much to invest in a share, there is a position sizing
formula you can use, the team of experts at Investment U
You should stick with about 3% of your equity portfolio. If you want to be conservative, invest less. If you want to be aggressive, invest more. But not too much more.
Don’t fall in love with an investment
The saddest stories heard in the financial press are those of people who took a serious financial hit late in life because they were overconfident. In short, they liked an investment so much they plunked too much in it. Big mistake.
Yes, you could hit the jackpot that way and some people have. But that’s a roll of the dice and it’s perhaps not the safest way to go.
Not spreading the risk might feel like the right thing when a share is rising, but it sure hurts on the way down.
You can afford the hit
That’s why position sizing is important.
It’s not just about the size of your initial position; it’s also about how much of your portfolio the position becomes.
Many investors refuse to diversify even when a single stock becomes a substantial percentage of their entire portfolio. They always had the same excuse: “I just can’t afford the tax hit.”
But taxes should never be the first priority in running your investment portfolio. Former blue chips that went down like a ton of bricks have taught us that. In hindsight – the tax bite can look like a kiss on the cheek.
So there you have it why you should use position sizing.