04-13-2014, 03:54 PM
I was looking through the previous threads and was surprised not to find one that explicitly deals with weighting. Weighting is an extremely important part of any investment plan for controlling risk through diversification.
I see three separate aspects to the weighting decision.
First, what is the maximum percentage of an individual stock in the portfolio. This directly determines the number of stocks in a portfolio. A 4 or 5% weighting appears to be very common.
Second, how are the stocks weighted in the portfolio. This is a very hot topic currently for index funds, where price, capitalization, equally, fundamentals (a mixture of parameters used to determine economic size), and beta (volatility correlation) are used for weighting. For dividend growth investors, equal weighting appears to be common.
Third, when is the weighting applied. The weighting can be applied at the time of purchase and at rebalancing events or it can be applied to a target portfolio.
I weight stocks based on the confidence in the industry.
Higher Risk (for example financial and retail) = 2%
Basic Industry = 4%
Consumer Staples =6%
Railroads = 8%
Weighting is applied at the time of purchase with rebalancing occuring when the stock price is overvalued compared to an extrapolated 5 year value.
I see three separate aspects to the weighting decision.
First, what is the maximum percentage of an individual stock in the portfolio. This directly determines the number of stocks in a portfolio. A 4 or 5% weighting appears to be very common.
Second, how are the stocks weighted in the portfolio. This is a very hot topic currently for index funds, where price, capitalization, equally, fundamentals (a mixture of parameters used to determine economic size), and beta (volatility correlation) are used for weighting. For dividend growth investors, equal weighting appears to be common.
Third, when is the weighting applied. The weighting can be applied at the time of purchase and at rebalancing events or it can be applied to a target portfolio.
I weight stocks based on the confidence in the industry.
Higher Risk (for example financial and retail) = 2%
Basic Industry = 4%
Consumer Staples =6%
Railroads = 8%
Weighting is applied at the time of purchase with rebalancing occuring when the stock price is overvalued compared to an extrapolated 5 year value.