Position Size

I received an email from a reader asking about position sizes in his 401k. The account size is not huge but big enough for some real diversity.

The reader shared that he has 32 positions. The largest holding as a very good OEF that comprises 9% of the portfolio and the smallest position is a CEF that captures a particular effect that has a 0.5% weight. He wanted to know if positions under 5% were worth it.

The short answer is yes.

I told the emailer that the half a percent weight might be a little light. I doubt that such a small weighting could capture whatever effect that is trying to be captured.

He gave me only two names out of the 32 but both were funds. Portfolios with a lot of funds need to be diligently monitored for overlap. I realize this can be tough to do for timeliness but do what you can.

My starting point for assembling a portfolio is to decide what weightings I want in each sector. I then go sector by sector using common stocks, ETFs or a combo of both. I then tweak those by factoring in things like the sector weightings in, for example, the India Fund for clients that will own that or the water ETF for people that own that.

This can be harder to control with broad based funds.

As for weightings with individual stocks, most of the time I weight a stock at either 2% or 3% of a portfolio. Google was an exception to the low side at about 1%-1.5%.