Stock holding size matters when building an investment portfolio. This important factor affects investment performance, cost, and risk. That means position sizing for each stock should be carefully considered. Position size can be determined by cost, market value, or the number of shares held. Generally, investors want to invest about the same amount in each position. In this lesson, we explore the importance of stock holding size and how investors determine how many stocks to buy and hold.
What you learn from:
Stock holding size matters
The size of your stock holdings in your investment portfolio matter. The position must be large enough to have a positive growth effect, but holdings should not be so large that they increase risk in a downturn. And costs of building and managing the investment portfolio must always be kept as low as possible.
FAQ about Stock holding size matters
We begin with FAQs that investors have asked about stock holding size. Each question and answer covers part of the stock holding size topic but some answers do overlap. That overlap helps investors understand how interrelated answers fit into the broad investment picture.
How long should investors hold shares?
Every investment plan should define the investor's minimum holding period. Although 12 months is long-term for most tax authorities, owners of high-quality and productive investments need a much longer horizon to build wealth. They consider anything less than five years a short-term hold and want to hold forever if possible.The ideal holding period depends on the investor's circumstances, goals, risk tolerance, market conditions, and each specific stock held. Thirty years is an excellent long-term wealth-building cycle. Still, adjusting your strategy as markets change is essential to meet your goals.
In contrast, traders buy and sell as soon as an increase slows or declines to profit quickly from price changes. A strategy that can only outperform when markets are strong.
How many investment positions should I hold?
No-Worry Investors start by investing in an S&P 500 Index ETF. They then use Smart Diversification as their guide to add five productive stock positions while monitoring and adjusting returns as needed.Step three involves repeating the stock selection process for up to ten more productive stocks. That creates a solid foundation for building wealth as you continue learning about investing, trading, speculations, and portfolio management.
As a minimum, consider a portfolio of five positions, with up to 20 positions being workable. However, many significant investors hold most of their wealth in as few as 5-10 productive holdings.
Beware of advisors who push over-diversification with trades that add commissions but produce poor investment returns. Seek a trustworthy advisor instead.
How many stocks are too many?
Seven signs you own too many stocks include,
1. Managing the portfolio is a challenge.
2. You can't remember why you bought each stock.
3. You can't say how each stock diversifies your portfolio.
4. Portfolio changes increase costs without improving returns.
5. You blank on a stock's details, challenges, and opportunities.
6. A significant stock value change has little impact on the portfolio.
7. An over-diversified, over-traded portfolio underperforms the market.
How are stock position sizes determined?
When buying stock, the number or value of shares purchased measures position size. Position size relates to the size of the investment account.As a result, position sizes change as the portfolio grows. After researching to decide which stock to buy, consider the following.
Calculate the desired position size as a percentage of the portfolio.
Round off to buy in 100 share multiples.
For high-priced stocks, buy the number of shares you can.
Make similar-sized buys for multiple portfolio positions.
For a five-position portfolio, purchase about 20% for each.
For 20 holdings, purchase about 5% each.
When doing online research, be aware that most position size recommendations target traders, not investors. However, investors profit most by keeping costs low with few trades.
Why does stock holding size matter?
The right holding size of each stock in a diversified, well-balanced portfolio of productive stocks delivers maximum results, minimal cost, and the lowest possible risk. As a result, when prices do increase, larger holding sizes have a more significant impact on portfolio values.But when position sizes are smaller, even a considerable price movement has a negligible effect on the value of a portfolio. As another result, larger position sizes mean fewer trades, keeping costs lower.
As a general rule, the right size of each portfolio position is approximately equal in value. But values change, so wise investors monitor, research, do due diligence, and adjust as needed to remain balanced and current.
Can you hold a stock forever?
Yes, and there are benefits of long-term holdings but there are few truly forever stocks. A forever stock is a great company that pays and grows forever. By compounding the returns, investors can make it a fun and very profitable ride. It is also hassle-free investing and very easy to manage. However, in practical terms, for the best forever results, investors must remain alert and monitor markets and investments. Over the very long-term things do change as decades pass. The creative destruction of capitalism means new opportunities are always being created as old industries decline. To ensure they capture the most benefits, wise investors remain aware of both the emerging opportunities and declining industries. Over time, wise investors shift as needed.Core content: Stock holding size matters
Knowing and understanding how to get each position size right helps investors learn about markets and investing. Becoming comfortable with determining position sizes helps investors improve as portfolio managers. That comfort brings better portfolio performance and opportunities at lower risk. As a result, they gain another superior investor skill. Links at the end guide you to related content.
The number of positions
The discussion of the number of positions in a portfolio goes together with considering the size of each position. Discussion on how many stocks to hold in a portfolio settled on a range of 5 to 30. My preference is 10 or so for a growth portfolio and 20 or so for a more conservative dividend portfolio.
When speculating or bottom fishing an attention-demanding high-risk portfolio may hold over 30 positions. That very aggressive approach is definitely not for beginners.
In fact, not many experienced investors play this specialized approach well. Until you have significant investing and trading knowledge, stay completely away from any aggressive speculative strategy.
The 60-position diversification myth
Some financial service providers push a 60-position portfolio as a diversification minimum. This is nonsense and part of a scheme to intimidate and overwhelm investors. The intention is to make a small investor think only a financial professional wizard is able to properly manage an investment portfolio. The intention of the scheme is to get investors to surrender control of their wealth to these investment wizards.
Don't fall for this scheme that intends to take control of your money. Treat it as distracting noise pumped out by people that want to get their hands on your money. They are not concerned about or committed to your financial future.
There is good reason that genuine investment leaders like Warren Buffett encourage individual investors. He has regularly pointed out small investors have advantages over large funds and financial service companies. So, when it comes to position count and sizing, behaving like a small, aware, and informed investors will serve you well. Your wealth-building and satisfaction will be able to both outperform holding a 60-position portfolio.
Investors that learn about markets and investments develop into superior investors that know what they are doing. They do not make the mistake of taking too many positions which leads to an over-diversified and underperforming portfolio. Rather, they do what serious wealth-builders do, they own far fewer well-selected stocks in quantities that matter. That produces a portfolio with high impact, lower cost, and managed risk that will perform over an investment lifetime.
The position sizes
Size matters for stock positions and portfolio performance. Portfolios holding the right number of positions show improved investment performance results.
Difference Making Size
At a minimum buy shares in lots of 100.
Your difference in position size means that with success you must change your worth. Because size matters in buying stock positions, unless you buy enough shares of a specific company to materially benefit from a rise in the stock price, don’t buy any unless you can buy enough. Doing the research and taking the investment risk must have a good potential payoff. Otherwise, why do it?
The need to own large enough positions or difference-making position sizes, means you have to pass on holding small numbers of shares. As your absolute minimum, think of buying multiples of 100 share lots. Size matters in buying stock positions because buying large enough lots allow you to have a reasonable cost per share. Like all costs, the transaction cost per share can significantly affect your overall return.
The 100 lot of shares priced above $1.00 is called a board lot. There are techniques of buying smaller amounts, called odd lots, or buying lower-priced shares but we discuss those topics at another time, in another lesson.
Position size factors to consider:
- 1Size Matters - position size must be large enough to matter when the price moves.
- 2Affordable Costs - buy enough at a time to avoid the cost of multiple trades.
- 3Minimum Risk - diversify and check position sizes to keep risk to a minimum.
Buy enough to:
- 1Change Your Worth - when prices move, portfolio values increase.
- 2Minimize Share Transaction Cost - buy using few trades.
- 3Buy Board Lots - 100 share lots are the investment standard.
- 4Round Up - buyers round up when a position price falls between board lots.
Takeaways from,
Stock holding size matters
Stock holding size matters. The messages in this lesson teach that each stock holding size in your portfolio must be large enough to make a difference, but not so large that downside risks become too large. This will tip the risk odds in your favor, and by keeping trades to a minimum, it will also tip costs in your favor.
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Portfolio Building That Works Money:
Introduction to Building Money Working Portfolios Lesson 1
3 Portfolio success keys Lesson 2
Stock holding size matters Lesson 3
Costs drive portion size Lesson 4
Controlling emotions for investing success Lesson 5
Join exceptional wealth builders Lesson 6
Pyramid portfolio wealth building Lesson 7
Next lesson 4: Costs drive portion size
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Bryan
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Lesson code: 345.07.
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