Sizing up your position

Until this year, I’ve been a “set it and forget it” investor, investing in S&P 500 index funds. However, I’ve been doing more research on individual names and have recently started investing in single name stocks. With 30+ years time horizon, what’s a good strategy in sizing up your position? The stock I like has run up 20% since I bought in my 20% during the market pullback in the beginning of the year, but now that I have more cash to buy more I’m not sure if I should wait for another pullback or buy more at current prices? I’d appreciate any insight on this. Thank you in advance!

This is where target allocations come in handy. if your allocation is above target, sell more, if it’s below target, buy more. But of course this assumes you have some kind of method for coming up with a target allocation. Asset class allocations are helpful this way, and there are some traditional ones, like 60/40, or some other allocation with other assets like REITs or currencies or commodiites or alternatives.

As for individual positions, it’s a little harder unless you are doing something like a quant optimization, but you can at least try to figure out what direction to go. For example, with your stock that is 20% up since you bought it, you might take a look at the annualized rate of return (best to include dividends if you got any) since you bought it and decide whether you think that rate of return is above your expectation for the stock or below the expectation. If it’s above expectation, then you’ll want to sell some, or at least lower the target allocation in your portfolio. If your portfolio has more cash in it because you added money, then you might end up buying more because of the larger portfolio size even though the percentage of the total portfolio goes down, so there are things that interact.

If the rate of return on the stock is below what you think it is likely to be in the future, then buy more. If you are expecting about the same performance in the future (annualized) as you got in the past, then you will want to buy more, but only enough to keep the proportion of your portfolio allocated to the stock about the same.

Position sizing is quite an interesting part of portfolio management. I happen to like it because it helps me sleep better at night and feel more calm about pulling the trigger on ideas that I’m not 100% sure about (and pretty much no idea is 100% sure).

Kelly Criterion?

If your portoflio consists of one stock and cash, Kelly Criterion is an option. Otherwise the Keyy Criterion needs to be used with total portfolio risk, not a single stock.