Portfolio management is one of the most important things a successful trader can learn. Often, investors focus on trying to pick that winner rather than figuring out how to set up a system that allows them to tilt the odds in their favor and play with the market, not against it.
The Question
People often start out investing with poor strategy and portfolio management skills. This causes them to place too much money in each position and dig themselves a hole. To get out of the hole, they start taking bigger risks and increase the amounts of each trade. I think it’s fair to say that this is not what you want to do.
So, the question remains: how big should my trades be?
The Answer
Now, there is no magic value to answer this question. The purpose of your investing as well as you personal circumstances really shape the answer.
For example, I invest purely to get better at it and almost never withdraw anything from my account. Because the money isn’t for retirement or living income, I can be a little more loose on my trades. Every position I take is around 15% of my total portfolio.
I understand that this puts a significant portion at risk, but through other portfolio management rules and carefully watching the market I am able to keep things under control.
If you don’t have a whole lot of time to watch the market, you should consider investing 5% or less of your portfolio.
One other consideration is the size of your portfolio. If you are investing with $200,000 it is realistic to consider positions of 2% ($4,000) or less. If you are like me and have considerably less, 2% of your portfolio might be unrealistic as commissions would force you to get a return of 10%+/trade just to turn a profit.
The important thing to remember is how big of a deal it is to establish your own trading rules, follow them, and keep a level head. If you can do this you will put yourself ahead of most of the personal investors in the world.
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