What is position sizing?
Position sizing is the decision of how much of a portfolio to put into a single investment. It matters as much as the choice of the investment itself: the same stock can be a sensible addition at 3% of a portfolio and a dangerous bet at 30%.
The size of a position limits how much it can hurt. A holding's loss, multiplied by its weight, is roughly what it costs the whole portfolio:
Common approaches
A fixed maximum weight. Many investors cap any single stock at a fixed share, often 5% or 10%, and any single sector or theme at a larger one. Broad funds, which are diversified in themselves, are usually exempt.
Equal weighting. Every position gets the same share. It is simple and prevents any one holding from dominating, but it ignores that some investments are far riskier than others.
Risk-based sizing. Positions are sized so that each contributes a similar amount of risk: a stock twice as volatile gets roughly half the weight.
Conviction-based sizing. Larger positions for the ideas an investor believes in most. It is common among active investors, but convictions are often most wrong where they are strongest.
A simple illustration
A portfolio worth €50,000 holds a single stock that falls 60%, as individual stocks regularly do in a bad year:
| Weight of the stock | Loss on the stock | Loss for the portfolio |
|---|---|---|
| 3% | +900 | +1.8 |
| 10% | +3,000 | +6 |
| 30% | +9,000 | +18 |
At 3%, the fall is an annoyance. At 30%, it wipes out several years of typical returns.
Positions drift
A position that rises strongly becomes a larger share of the portfolio without any decision being made. A stock bought at 5% that triples while the rest of the portfolio stays flat ends up at around 14%. Checking position sizes regularly, and trimming those that have grown beyond their intended size, is part of rebalancing.
Things to keep in mind
- Look through funds. A stock that is also among an ETF's largest holdings is a bigger position than its direct weight suggests.
- Size by what can be lost, not by what can be gained. The upside of a small position is limited, and so is the damage it can do.
- Correlated positions add up. Three 5% positions in the same industry behave more like one 15% position than like three separate ones.
A worked example
Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.
Am I too concentrated in one stock?
I show your largest holding as Vanguard FTSE All-World UCITS ETF at 13,96% of the portfolio. You hold 16 positions; your top five holdings together make up 49,19% and cash is 5,76%.
Common thresholds used for concentration: 10% is often considered a notable single‑holding share; 20% or more is usually seen as high concentration. At 13,96% your biggest position sits above the "notable" threshold but below the "high" threshold, and your top five equal about half the portfolio, 49,19% — useful context for judging concentration against your own preferences.
Related topics
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