How I Determine Position Size

One of the most common questions investors ask is:

How large should my position be?

Unfortunately, most people ask this question after finding an investment idea.

I believe the process should work in the opposite direction.

Position size should not be determined by conviction.

Position size should be determined by risk.

---

The Wrong Approach

Many investors follow a process that looks like this:

Find an opportunity → Become excited → Increase size.

The stronger the conviction, the larger the position.

This approach feels logical.

It is also responsible for many large drawdowns.

Markets do not care about conviction.

Markets care about outcomes.

A highly convincing idea can still be wrong.

---

The Framework I Use

I start with portfolio objectives rather than trade ideas.

Step 1: Define your return target.

What annual return are you trying to achieve?

10%? 15%? 20%?

Step 2: Define your maximum acceptable drawdown.

How much pain can you tolerate before the strategy becomes unacceptable?

10%?

15%?

20%?

Step 3: Create a risk budget.

I generally think of a single investment idea as consuming between 1/10 and 1/20 of the maximum drawdown budget.

This means no single idea should be capable of significantly damaging the portfolio.

---

A Practical Example

Assume the following:

• Portfolio value: $100,000
• Target annual return: 12%
• Maximum acceptable drawdown: 15%

A 15% drawdown means the portfolio can tolerate a loss of $15,000.

If we divide that risk budget into 15 equal units, each investment idea receives approximately 1% of portfolio risk.

In this example:

• Risk budget per idea = $1,000

Only after determining this number do I think about position size.

The question becomes:

How large can the position be if I am willing to lose no more than $1,000?

This is very different from asking:

How much money should I put into this trade?

---

Why This Matters

Many investors fail because they focus on maximizing returns.

Professional investors focus on controlling losses.

Large drawdowns require disproportionately large gains to recover.

A portfolio that loses 50% must gain 100% simply to break even.

Avoiding catastrophic losses is often more important than finding extraordinary opportunities.

---

Reader Exercise

Before entering your next investment, answer the following:

• Portfolio size: ________
• Target annual return: ________
• Maximum acceptable drawdown: ________
• Risk budget per idea: ________

If you cannot answer these questions, you may not be sizing positions.

You may simply be allocating capital based on confidence.

---

Final Thought

Most investors spend years searching for better entry signals.

I believe a more useful exercise is learning how much to invest before deciding what to invest in.

Position sizing will not guarantee success.

But it can prevent a single mistake from becoming a permanent setback.

That is why I continue to believe:

Position sizing before strategy.

Related Articles

• Position Sizing Before Strategy
• The First Rule Is Survival
• Why Most Traders Lose Money

---