Position Size ... What Do You Do?

[Dividend Watcher]

Rasec asked a good question in the "What did you buy today?" thread. Since we seem to have a bunch of newish investors joining us of late, I thought it would help to break the discussion out of that thread and put it here so it's easier to find.

(09-08-2015, 12:21 PM)Rasec Wrote: What do you guys define as a full position vs a half position? Is there a rule or it's up to everyone to define?

I think the answer is for everyone to determine for themselves what a 'full position' is taking into account your age, where you are in your investing lifecycle, your resources and your goals.

I'm in my late-50s and hope to be able to scale back working for a living in less than a decade. My goal is to have sufficient dividend income to 'retire' and live off Social Security and my portfolio without dipping into the principal in my twilight years. My portfolio business plan is here. It may explain my goals better.

As an aside, do you have some kind of plan for your portfolio(s)? It doesn't have to be as formal as mine but I find it helps to write it down somewhere (even sticky notes attached to your monitor) as it's been shown that you get some mental reinforcement by the act of writing itself.

When I was transitioning to a dividend growth portfolio, I took my starting amount and calculated what the value of the portfolio was going to be in 3 years. I took into account the expected dividends, what I reasonably expected to be able to add to the portfolio and a reasonable growth of capital to come up with the final value.

My original goal was to have about 25 different companies in my portfolio spread across 9 of the 10 S&P GICS sectors. Since I expected to be close to fully invested, I divided 100% of the portfolio by 25 securities to get 4% of my 3 year projected portfolio value. That was my 'full position'. Over time, I realized I didn't necessarily want some companies to be 4% of my portfolio; cyclical basic materials was one, Canadian banks another (due more to currency fluctuations than my distrust of big banks). So, for the companies which I considered my core positions -- GIS/UL/ABT (pre-ABBV spinoff)/CVX/PEP/T/etc. -- I left at 4% of projected portfolio value and expanded the desired portfolio and adjusted the percentages down from there.

It's important to remember that you don't have to keep shuffling the portfolio to meet your desired position size. That just puts more money into your broker's pocket than your own. I usually let them grow on their own until they reach an oversized portion of 8-9% of the portfolio before thinking of trimming. This, of course, then makes your other positions go out of whack with your goals. I'm not so concerned with that. Afterall, position size, to me, is just a guideline. The goal for me is to have the bulk of the portfolio in large, blue chip companies that pay me a steadily increasing income over time.

When it gets to about a year before my projected portfolio date, I review my goals and come up with a new projected value 3 years hence. Without changing the percentages, sometimes I find that what was a 'full position' is not quite full any more due to growth of the portfolio as a whole. In that case, I might be looking to add to that position in the future.

I also look at the income percentages of each holding. I don't want to be dependent on one company to be providing 15% of my retirement income and then have them cut the dividend on me. Although I have no set position sizes on income, I do look for "reasonableness" and if something is too far out of range, adjust the value position size.

Lastly, your 'full position' size companies could change over time. I'm finding that as I get closer to retirement, I'm more interested in the higher yielding REITs and utilities becoming a bigger part of the portfolio. So, on the next revision, I'll probably be bumping up their percentages a bit and dropping the percentages for the lower yielding, higher growth companies while still trying to maintain the dividend growth rate at 150% of expected inflation listed in my portfolio business plan.

That's my long-winded explanation of position size from my point of view. Anyone else care to join in?

[KenBob]

I use a fixed dollar amount to define a full position, so that when a position is filled another stock will be bought to force diversification. When all stocks on my short list have been filled, I then can raise the dollar amount.

The actual full position amount will depend upon composition of the total portfolio. My portfolio has a large amount of mutual funds in my 401K and IRAs, while my wife's portfolio is primarily individual stocks from an inheritance. Both portfolios are roughly the same size. My full position amount is twice my wife's full position portfolio, since her portfolio has a greater need for diversification.

[crimsonghost747]

I actually have no such thing as a "full position". I just have small positions valued at roughly $1000 that are used for more speculative plays. Usually smaller companies and almost always more risky than the ones I have larger positions in. Most of these positions don't even fall into the category of dividend growth investing at the moment.

Pretty much everything above the $1000 mark is a "regular position" and there I have no set limits regarding value or % of portfolio. I simply buy what I think is the best value at the moment, I do not even try to keep these positions around the same size. Diversification is done with common sense.

[Kerim]

I’ve said several times before that because I am still deep in the accumulation phase of my investing career, weightings and allocations do not concern me too much. Whenever this topic comes up, I imagine making a couple of charts to illustrate my point. Well, this thread finally got me off my butt.

I completely believe that target weightings are important, but only when your portfolio starts to become fairly large and mature. In the early phases of building the portfolio, being overly concerned about maintaining equal-sized positions serves mainly to tie your hands such that you miss the best opportunities.

So here is my illustration. The first picture here is a (somewhat fictionalized) picture of my portfolio right now.

   

Obviously, it is really lopsided, hugely exposed to XOM and MO, for example, both of which would appear to be waaaay beyond a “full position” relative to the current size of my portfolio. If I focused mainly on the value of my current positions, I would be crazy to add more XOM, even at bargain basement prices. It just isn’t safe to have so many eggs in that one, basket right?

Well, not so fast. Here is another picture, this one showing the same current positions (in blue) against the portfolio that I am hoping and planning to ultimately build (in orange).

   

This is the point I’ve tried to make several times in words. My ultimate portfolio is going to be – I hope – a whole lot bigger than my current one. And to fill it out, I am going to need a lot more of ALL of the companies I’ve got, and of some others too. Even though XOM is a disproportionate share of my current portfolio, I need to buy a bunch more to complete my eventual portfolio. From this perspective, it is clear (to me, at least) that I should buy XOM whenever it presents a compelling value. Sure, I could buy more PG instead right now to achieve a better short term balance, but that will put a major drag on my performance, because PG is (in my opinion) a far inferior value right now.

So yes, the target weightings of your positions is important, but you should make that evaluation based more on where your portfolio is heading, and not its current values. Unless you are near or in retirement, better to focus your new funds on the best opportunities you can find rather than constraining yourself to keep your relatively small positions artificially balanced.

(Again, these pictures are illustrative only -- these are not actual target positions!)

[cannew]

Great comments. In the accumulation phase one can invest in the different DG stocks which are value priced or one they want to develop positions. The number of stocks, as far as I'm concerned, should not be of major concern, rather I suggest developing a group of stocks that one feels will meet your objectives in the long term.

In hind sight I wish I'd taken that advice and selected say 10 stocks (banks, communications, pipelines, utility, food, railway, reit) and just built positions in those. I'd gladly hold $1M in 10 great DG stocks than in 100 just to diversify.

[rayray]

I'm not a 100% sure what my full position number is supposed to be, in terms of dollars or percentages as a whole. I do know that I treat my 401kplan and my Vanguard Roth/Brokerage accounts as two separate entities.

In my 401 kplan, investing over the course of almost 20 years plans changed. I use to re-allocate dollars once a mutual fund grew to more then 20% of total portfolio, so if a fund became 23 to 25% of total portfolio it was adjusted downward to the 18 to 20% range. Over time as the account grew so did the amount of different funds I have acquired. But now the largest holdings are in the 9 to 11% range getting trimmed once they reach 15% of total weight.

In my Vanguard account my largest holdings are U.S Healthcare Fund and Markel at 12 and 10% respectfully. The U.S. Healthcare fund gets trimmed at 15% and no further purchases of Markel (Markel never gets trimmed, it is what it is). All my other individual holdings range anywhere from 1.2% to the 3 maybe 4% range. I'm in the camp that 100 stocks is better then 10. For example, when I was considering Canadian bank stocks and had set aside a certain amount of dollars to invest in that arena I took that amount and invested in the top 5 Canadian banks, of course, I look at Canadian banks different then say, the top 5 tech companies. Actually, I originally invested in one Canadian bank stock and wanted more exposure and couldn't make up my mind after some research, that's when I allocated and invested in the remaining 4 companies.

For some reason, I do like to receive a certain amount of yearly dividends from each company, so I usually keep buying that company until I reach that amount in dividend income, as long as that company is properly valued. But that's just my quirky craziness.