Course 501: Constructing a Portfolio
Portfolio Weighting
In this course
1 Introduction
2 The Fat-Pitch Approach
3 What Do the Academics Say?
4 How Many Stocks Diversify Unsystematic Risk?
5 Non-Market Risk and a Concentrated Portfolio
6 Portfolio Weighting
7 Portfolio Turnover
8 Circle of Competence and Sector Concentration
9 Adding Mutual Funds to a Stock Portfolio
10 The Bottom Line

In addition to knowing how many stocks to own in your portfolio and which stocks to buy, the percentage of your portfolio occupied by each stock is just as important. Unfortunately, the science and academics behind this important topic are scarce, and therefore, portfolio weighting is, again, more art than science.

We do know that the great money managers have a knack for having a greater percentage of their money in stocks that do well and a lesser amount in their bad picks. So how do they do it?

Essentially, a portfolio should be weighted in direct proportion to how much confidence you have in each pick. If you have a lot of confidence in the long-term outlook and the valuation of a stock, then it should be weighted more heavily than a stock you may be taking a flier on.
 
If a stock has a 10% weighting in your portfolio, then a 20% change in its price will move your overall portfolio 2%. If a stock has only a 3% weighting, a 20% price change has only a 0.6% effect on your portfolio. Weight your portfolio wisely. Don't be too afraid to have some big weightings, but be certain that the highest-weighted stocks are the ones you feel the most confident about. And of course, don't go off the deep end by having, for example, 50% of your portfolio in a single stock.

Next: Portfolio Turnover >>


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