Portfolio Management Position Sizing Example: Stock versus SPY
PORTFOLIO MANAGEMENT USING 5% and +/-1% Position Size
Use a starting allocation of 5% of a portfolio to this stock: When the stock outperforms relative to the S&P by 20%, the weighting will have risen to 6%. Therefore, trim the position back to 5% by selling shares. Sell 16.66% of your shares to trim the position from 6% back down to 5%.
Then, you wait for either a 6% weighting again, or a drop down to 4% weighting. If the position drops by 20% relative to the S&P, it will be down to a 4% position. Therefore, buy shares by 25% (once or twice, at most) to get from 4% position back up to 5%. Once relative outperformance increases by 20%, then sell back down to 5%. Sell 16.66% of the shares.
If you have a $500,000 Portfolio, then a 5% weighting will be $25,000. Therefore: Each 5K buy/sell will yield (roughly) a $1000 profit or 20% return. $1000 return is 4% return on the $25,000 weighting. There are 6 completed buy/sells for a total of 24% additional return to the position, and an incremental 1.2% return to the overall portfolio. ($6,000 profit roughly / $500,000 portfolio)
All of this work may seem like a waste of time at first glance, but over time this is a way of capturing volatility and making extra return, all while managing risk to a systematic method. For portfolio managers trying to justify their fees of 0.5% per year, finding multiple ways to bank extra "risk-free" returns seems like an easy decision to me.
One pitfall: Don't keep buying and loading up. The key is to have a max amount of buying that you will do, or else you will keep buying on 20% relative drops and that isn't the point. Pick a strict limit and stick with it.
Best regards,
Tim 11:34PM Tuesday, November 18, 2014
Use a starting allocation of 5% of a portfolio to this stock: When the stock outperforms relative to the S&P by 20%, the weighting will have risen to 6%. Therefore, trim the position back to 5% by selling shares. Sell 16.66% of your shares to trim the position from 6% back down to 5%.
Then, you wait for either a 6% weighting again, or a drop down to 4% weighting. If the position drops by 20% relative to the S&P, it will be down to a 4% position. Therefore, buy shares by 25% (once or twice, at most) to get from 4% position back up to 5%. Once relative outperformance increases by 20%, then sell back down to 5%. Sell 16.66% of the shares.
If you have a $500,000 Portfolio, then a 5% weighting will be $25,000. Therefore: Each 5K buy/sell will yield (roughly) a $1000 profit or 20% return. $1000 return is 4% return on the $25,000 weighting. There are 6 completed buy/sells for a total of 24% additional return to the position, and an incremental 1.2% return to the overall portfolio. ($6,000 profit roughly / $500,000 portfolio)
All of this work may seem like a waste of time at first glance, but over time this is a way of capturing volatility and making extra return, all while managing risk to a systematic method. For portfolio managers trying to justify their fees of 0.5% per year, finding multiple ways to bank extra "risk-free" returns seems like an easy decision to me.
One pitfall: Don't keep buying and loading up. The key is to have a max amount of buying that you will do, or else you will keep buying on 20% relative drops and that isn't the point. Pick a strict limit and stick with it.
Best regards,
Tim 11:34PM Tuesday, November 18, 2014
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