Position Sizing: How Much to Invest in Any Single Trade
Most retail investors spend most of their analysis time on a single question: Should I buy this stock?
But there is a second question, often more important to long-term outcomes, that gets far less attention: If I am going to buy it, how much should I buy?
Position sizing — the discipline of determining what percentage of your portfolio to allocate to any single investment — is not the most exciting topic in investing. But poor position sizing is responsible for more retail investor losses than poor stock selection. You can be right about a stock and still get hurt badly if you are over-concentrated in it.
Why Position Sizing Matters
Consider two investors, both of whom invest in the same stock that subsequently drops 50%:
Investor A: Allocated 40% of their portfolio to this position. Portfolio impact: -20%.
Investor B: Allocated 5% of their portfolio to this position. Portfolio impact: -2.5%.
Both made the same stock selection mistake. But Investor A’s financial situation is materially different from Investor B’s. Investor A may need years to recover. Investor B barely notices.
Position sizing determines how much any single decision can hurt you — or help you. It is the mechanism by which you control the relationship between the volatility of individual investments and the stability of your overall portfolio.
The Core Principle: No Single Position Should Ruin You
The fundamental goal of position sizing is straightforward: no individual position should, on its own, cause catastrophic damage to your portfolio if it goes to zero.
“Catastrophic” is personal — it depends on your goals, time horizon, and emotional risk tolerance. But as a starting point: most experienced investors would argue that a single position going to zero should not cost you more than you can recover from within a reasonable timeframe.
This leads to a rough principle: limit any single position to a percentage of your portfolio where, if that position went to zero, you could recover your total losses within 1-3 years of normal investing.
Simple Position Sizing Frameworks
The Equal-Weight Approach
Divide your portfolio into equal positions. If you hold 20 stocks, each gets ~5% of your portfolio.
Pros:
- Simple to implement
- Automatic diversification
- No position can disproportionately hurt or help you
Cons:
- Treats a high-conviction idea the same as a low-conviction idea
- May dilute focus too broadly
Best for: Investors who prefer consistency and simplicity over optimization.
The Conviction-Weighted Approach
Vary position sizes based on your level of confidence:
- High conviction: 5-10% position
- Medium conviction: 2-5% position
- Low conviction / speculative: 0.5-2% position
Pros:
- Allows higher exposure to your best ideas
- Lets you hold speculative positions without catastrophic risk
Cons:
- Requires honest self-assessment of conviction (most investors are overconfident)
- Risk concentrates in positions you feel most certain about — which is not always where you’re actually most right
Best for: Investors with genuine research-based conviction and the discipline to size down when conviction is lower.
The Risk-Based Approach (1% Rule)
Decide in advance how much total portfolio loss you’re willing to accept on any single trade if it goes wrong.
Example:
- You have a $100,000 portfolio
- You’re willing to lose at most 1% ($1,000) on any single trade
- You buy a stock where your stop-loss is 10% below your entry price
- Maximum position size: $10,000 (10% of portfolio), because a 10% drop would cost you $1,000
Formula: Position size = (Portfolio × Max loss %) / (Entry price - Stop loss price as %)
This approach forces explicit risk definition before every trade. If you are not thinking about where you are wrong before you enter, this framework surfaces that question immediately.
Best for: Active traders who have defined entry and exit points for each trade.
The Core/Satellite Approach
Divide your portfolio into two buckets:
- Core (70-90%): Stable, long-term holdings (index funds, blue chips, dividend stocks) in large positions
- Satellite (10-30%): Higher-conviction, higher-volatility positions in smaller sizes
The core provides stability. The satellite allows you to take shots at ideas you believe in without jeopardizing the whole portfolio.
Best for: Investors who want steady long-term returns but also want room for active ideas.
How Volatility Should Affect Position Size
Higher volatility assets should generally have smaller positions. A 5% position in a large-cap index ETF will not move much in a single day. A 5% position in a small-cap biotech stock can easily be +30% or -40% on a single announcement.
Rule of thumb: For every step up in volatility, step down in position size.
| Asset Type | Typical Volatility | Suggested Max Single Position |
|---|---|---|
| Broad market index ETF | Low | 20-30% |
| Large-cap blue chip | Low-medium | 5-10% |
| Mid-cap growth stock | Medium | 3-7% |
| Small-cap stock | High | 1-5% |
| Speculative early-stage company | Very high | 0.5-2% |
| Crypto / highly speculative | Extreme | 0.5-1% |
These are rough guidelines, not rules. Adjust based on your individual risk tolerance.
The Concentration Trap
Many retail investors build portfolios that look diversified but are actually highly concentrated in a single theme or risk.
Example: A portfolio of 10 tech stocks looks diversified. But if the government announces major antitrust action against large tech companies, all 10 may fall simultaneously. Sector concentration is a real risk even with multiple positions.
Signs your portfolio may be over-concentrated:
- More than 30-40% in a single sector
- Multiple positions that move together (high correlation)
- A single macro thesis underlying most of your holdings
- One company representing more than 10-15% of holdings
Diversification should account for correlation, not just position count.
Position Sizing for Event-Driven Investing
When investing around specific events (earnings, regulatory decisions, political announcements), position sizing takes on extra importance because the expected volatility is concentrated into a short window.
Pre-event sizing principles:
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Size to the downside, not the upside. What happens to your portfolio if the event goes the wrong way? Size based on that scenario.
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Binary events deserve smaller positions. Drug approval/rejection, legal ruling/dismissal, election win/loss — these events have binary outcomes. The uncertainty is extreme. Size accordingly.
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Pre-existing positions before expected events. If you already hold a stock heading into a known binary event (earnings, regulatory decision), consider whether your current position size is appropriate given that concentrated risk window.
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Use Natural Language Orders for pre-defined responses. If you have a defined response to an event outcome, writing it in advance (when calm) typically produces better position sizes than deciding in the moment when emotions are heightened.
Adjusting Position Sizes Over Time
Position sizes require active management. A 5% position that doubles in value becomes a 10% position. That may now be too large given your risk tolerance.
Regular portfolio review checklist:
- Has any position grown to represent more than your intended maximum?
- Has the investment thesis for any large position changed?
- Has new information (sector changes, company updates) altered your conviction level?
- Are any positions now correlated in ways they weren’t when you bought them?
Trimming winning positions is psychologically difficult — it feels like giving up gains. But maintaining appropriate position sizes through regular rebalancing protects the portfolio from individual position failures.
The Sizing Decision: A Checklist
Before entering any position, run through these questions:
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What percentage of my portfolio am I allocating? State it explicitly.
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If this went to zero, what is the impact on my total portfolio? Is that acceptable?
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If this dropped 50%, what is the impact? Would that cause me to act irrationally (sell in panic)?
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Am I sizing this based on conviction, or on excitement? Excitement is not conviction.
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Does this position correlate with other positions I hold? Am I adding true diversification or just more exposure to the same theme?
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Is my position size consistent with the volatility of this asset? Am I treating a speculative stock like a blue chip?
Position sizing is not glamorous. It does not generate insight into which stocks will outperform. But it is the mechanism by which you survive being wrong — and in investing, you will be wrong regularly. Managing how much each mistake costs you is the foundation of long-term success.
This article is for educational purposes only and does not constitute financial advice. Always consider your individual circumstances and risk tolerance before making investment decisions.