What's your maximum allocation to a single stock, sector, or market?

Discussion in 'Risk Management' started by Ghost of Cutten, May 31, 2011.

  1. As a % of your net worth, what is the maximum capital (face value) you would allocate to:

    A single stock
    A single sector (e.g. financials, oil services, homebuilders)
    A single market (e.g. corn, the Euro, US 10 year treasuries)

    Assume that you think it is an exceptionally attractive trade or investment.
  2. I usually allocate 2-3% for one stock.
  3. Why so low? Sometimes I have 2-3% in options premium, lol.
  4. 2-3% lets me have 30-40 positions in my portfolio to better manage risk in case of signle trade going wrong way and hurting performance of my account.
  5. 0.7% per position

  6. Three x 1% plus time decay = perfect cents oops, I mean sense.
  7. But you still have market risk, which 30-40 positions doesn't diversify away. If the S&P falls 20%, your 30-40 positions will probably fall a similar amount relative to their risk/beta. So, you haven't really reduced your risk much - only reduced single stock risk, but then you get far less return from your best 3 or 4 stock ideas. With 2-3% in one position, if you are spectacularly right and make a double or triple, you make peanuts. I doubt you can find 30-40 stocks per year that go up 100%+.
  8. So if you thought the S&P 500 was a screaming buy, you would invest 0.7%? If you thought oil was going to $200, you'd risk 0.7% on it? How do you make any returns?
  9. Butterball


    Face value is not an indicator of risk taken. 10 year treasuries are much less volatile than corn. IMO it makes sense to adjust position sizes to historical volatility. The face value of some positions (e.g. Eurodollar futures) may reach 250% of my total capital while other positions (e.g. cotton futures) may be below 1%.

    The question could be rephrased to "How much of your total account are you willing to lose on a high conviction bet".
  10. Visaria


    I'm happy to put 100% of my net worth in a single commodity, index future, currency. But not in single stocks.
    #10     Jun 6, 2011