It’s accepted wisdom (supported by good maths), that volatility in a portfolio can be reduced by drip feeding money into a stock position over a period of time, also known as ‘dollar cost averaging’.
If you’re a long-term investor, there are good financial models that show it’s actually better to get fully invested from the start, rather than to gradually build a position over a period of months; however the course I’ve come to prefer is to “buy in thirds”.
If I’m interested in a stock, have done my basic homework, and would like to really learn more about it, there’s really no greater motivator than to pick up an initial piece in my portfolio. I’ll generally consider this first purchase “my first third”.
Once I’ve owned the stock for a couple of months, have undertaken some additional research, and ideally actually used the product or services personally if that’s possible (or perhaps found a friend who’s had first-hand experience), if I still like the stock, I’ll purchase my second third.
If another few months or years pass, and really for whatever reason I just feel fully onboard, I’ll purchase my final third and consider this “a full position”.
In sizing purchases, the other factor to consider is how big a full position should be. For me, this is 6%, so if I’m buying in thirds, that’s 2% + 2% + 2%. Sometimes an earlier purchase will grow into a full position without new money being added; sometimes the stock will fall, and I’ll need to add extra new money to move it along – this is a fairly rare case though, as a significant decline in the stock price might in itself be reason to reconsider taking it to the next level (there are no hard rules here, I might really believe in the company, but think that the market is taking a short-termist view, and so still proceed).
The size of a full position might be different for different people, but I arrived at 6% using the following logic:
- I’ll generally want to hold around 5-10% of my portfolio in cash, to allow me to take advantage of new opportunities – at unusual times like right now that’s a much larger allocation
- I’ll generally have around 10% of my portfolio in a mish-mash of long-term positions that haven’t really grown as I’d like, but that I still broadly believe in – not things I want to sell, but not things I’m adding to either
- I would like the remaining 80% of my portfolio value to be in in a solid top ten of companies, to magnify the impact of my decision making
- I embrace the concept of letting my winners run, so recognise that some successful investments will grow way beyond their “full position” allocation
- I’m comfortable having a triple-sized position (3 * full positions) in one company, if I really really believe in it – but this will be extremely rare, perhaps no more than two of these at any one time, and I’ll want them to be fairly mutually exclusive in terms of PESTEL factors
It’s then just basic maths:
- 10% cash
- 10% mish mash of small positions and failed investments
- 80% top ten full positions, two of which take-up three slots rather than one = 14 full positions
So one full position = 80% / 14 = 5.7%. I’ve rounded it up to 6% to make the maths easier, and also because I’ll not always have two really outsized positions.
And now for a disclaimer where the theory meets reality. The above logic gives me an outline target for my portfolio, but the day to day world is really pretty messy. So while I’ll always broadly steer towards my target model with investment decisions, the portfolio in any given month can look wildly different, and it can change quite a bit month to month, particularly in volatile times like the middle of the Coronaconomy.
So right now I have 20% cash and the following remaining allocations (slightly rounded off for ease). I’ve tried to provide a rough outline on how I feel about each of these companies, and where they might sit in my mind in terms of being a full position, a one or two third position, or just part of the messy rest that’s neither here nor there.
| All Holdings | %age | Allocation Rationale |
| Shopify Inc | 19% | Triple full position, really really believe, but have had to trim multiple times |
| Intuitive Surgical Inc | 9% | Full position that I’m happy to let grow indefinitely |
| Amazon.com Inc. | 8% | Full position that I’ll keep an eye on |
| Tesla Inc | 6% | Full position, recently trimmed down from 11% |
| Alphabet Inc | 5% | Full position, recently trimmed down due to regulatory concerns |
| DocuSign Inc | 4% | Two-thirds position, looking for a reason to increase to a full position |
| MercadoLibre Inc | 4% | Two-thirds position, looking for a reason to increase to a full position |
| Universal Display Corp. | 3% | One-third position |
| NetFlix Inc | 2% | One-third position |
| Illumina Inc | 2% | One-third position |
| Beyond Meat Inc | 2% | One-third position |
| Exelixis Inc | 2% | One-third position |
| Walt Disney Co (The) | 2% | One-third position, looking for a reason to increase to a second third |
| Teladoc Health Inc | 1% | One-third position, looking for a reason to increase to a second third |
| Guardant Health Inc | 1% | One-third position, looking for a reason to increase to a second third |
| Editas Medicine Inc | 1% | Mish mash, looking for a reason to increase to a first third |
| Zoom Video Communications Inc | 1% | Mish mash, looking for a reason to increase to a first third |
| Stitch Fix Inc | 1% | Mish mash, considering selling this |
| Twitter Inc | 1% | Mish mash, looking for a reason to increase to a first third (or more?) |
| NXP Semiconductors NV | 1% | Mish mash, looking for a reason to increase to a first third |
| Abiomed Inc. | 1% | Mish mash, but has potential, keeping a watching brief |
| ShockWave Medical Inc | 1% | Mish mash, but has potential, keeping a watching brief |
| NovoCure Ltd | <1% | Mish mash, but has potential, keeping a watching brief |
| Take-Two Interactive Software, Inc. | <1% | Mish mash, but has potential, keeping a watching brief |
| Upwork Inc | <1% | Mish mash, but has potential, keeping a watching brief |
| 3D Systems Corp. | <1% | Legacy failed investment, but the sector might come back |
| ExOne Co | <1% | Legacy failed investment, but the sector might come back |
| AnaptysBio Inc | <1% | Recently failed investment, but the stock might come back |
| China Green Agriculture Inc | <1% | Legacy failed investment, too small to bother selling |
I’ve also provided a rough forward looking view against each company, so it will be useful to come back to this analysis in a year’s time, to see how the allocations have actually moved.
3 comments